RBA warns on lending standards

The RBA dialled up its warning on home-lending standards as it maintains stimulus to get the economy back on track once coronavirus restrictions are eased.

After the RBA’s monthly board meeting on Tuesday, governor Philip Lowe repeated last month’s warning that ‘it is important that lending standards are maintained’. Picture: James Brickwood

The Reserve Bank has dialled up its warning on the importance of prudent home lending standards as it keeps interest rates at record lows and continues buying government bonds, to ensure there’s enough stimulus in place to get the economy back on track once coronavirus restrictions are eased.

While sticking to its narrative that consumer price inflation will not be high enough to warrant lifting the official cash rate from a record low of 0.1 per cent before 2024, the central bank highlighted the fact that the RBA-chaired Council of Financial Regulators has been “discussing the medium-term risks to macroeconomic stability of rapid credit growth at a time of historically low interest rates”.

After the RBA’s monthly board meeting on Tuesday, governor Philip Lowe repeated last month’s warning that “it is important that lending standards are maintained” in this environment.

And in a hint at a possible first step down the path of tighter lending policies being applied to home loans, Dr Lowe also said it was important that “loan serviceability buffers are appropriate”.

In its quarterly statement last week, the CFR said: “Credit growth materially outpacing growth in household income would add to the medium-term risks facing the economy, notwithstanding that lending standards remain sound” and that it “discussed possible macroprudential policy responses”.

While monetary policy remained conducive to house price growth, the comments from regulators showed there were “headwinds on the horizon”, said Eliza Owen, head of research at CoreLogic.

The RBA’s warning on the importance of appropriate loan serviceability buffers came after data showed housing debt-to-income ratios for owner-occupiers hit a record high of 102 per cent.

RBA data also revealed that housing credit increased 5.6 per cent in the year to June, while ­national accounts data showed a growth in incomes of only 1.6 per cent over the same period.

“APRA data on quarterly property exposures for authorised deposit-taking institutions suggests that around 22 per cent of new mortgage lending has a debt-to-income ratio of six or more,” Ms Owen said. “This may also become a focus for more prudent lending conditions.”

Capital city house prices rose by a strong 1.5 per cent month on month in September, albeit that was the slowest monthly rate of increase since January.

“Affordability constraints already appear to be easing momentum in the market, with monthly growth rates of property values likely peaking in March 2021,” Ms Owen said.

AMP Capital’s head of investment strategy and chief economist, Shane Oliver, said macro­prudential controls were “widely expected” this year and, apart from increasing loan serviceability buffers, regulators could restrict high debt-to-income ratio lending and high loan-to-valuation ratio lending.

But overall, while the RBA remained upbeat on the outlook for the economy beyond the current disruption caused by coronavirus lockdowns, it was still “pretty ­dovish”.

A “setback” to economic expansion was expected to be “only temporary” as the economy was “expected to bounce back” as vaccination rates increased further and restrictions were eased.

“There is, however, uncertainty about the timing and pace of the bounce-back and it is likely to be slower than that earlier in the year,” Dr Lowe said.

“Much will depend on the nature and timing of the easing of restrictions on activity. In our central scenario, the economy will be growing again in the ­December quarter and is expected to be back around its pre-Delta path in the second half of next year.”

Positively, Dr Lowe said: “Many businesses are now planning for the easing of restrictions and confidence has held up reasonably well.”

While restrictions have had a significant effect on the labour market, with hours worked down nearly 4 per cent in August, the central bank’s business liaison and data on job vacancies “suggest that many firms are seeking to hire workers ahead of the expected reopening in October and November”.

Seek job ads rose 6 per cent month on month in September, driven by a 20.6 per cent rise in NSW ahead of its reopening on October 11.

“This suggests that the unemployment rate can be expected to resume its pre-lockdown trend decline in coming months,” said NAB’s director of economics, Tapas Strickland.

While the RBA has effectively tied its QE purchases at $4bn a week until February, the central bank’s expectations of an eventual strong rebound from the current lockdowns suggests a more aggressive “taper” of its bond-buying program may come in February.

“NAB’s view is that a tapering to $2bn in February from its current $4bn pace is likely,” Mr Strickland said.

“We have also pencilled in a further taper to $1bn with QE ending in September 2022, and bringing cumulative purchases under QE3 to $134bn.

“The risk from a sharp rebound is that the RBA ends QE earlier than September.”

On interest rates, Mr Strick­land remained of the view that the RBA would be on hold until 2024.

However, he said financial markets would continue to price the risk of the RBA moving in 2023.

“Global inflation trends and other central banks starting to ­either hike rates, or pave the way to hike, will keep markets pricing in the chance that the RBA achieves its inflation target earlier than 2024,” he said.