Capital Economics with the note:
The RBA’s latest Financial Stability Review painted a rosy picture of financial stability risks. Household debt as a share of disposable income remained at a four-year low in Q4 despite the fall in incomes as stimulus was withdrawn. (See Chart 1.)
And the high rate of saving over the last year means that households’ financial buffers in the form of cash and deposits have risen to an all-time high. Coupled with the reduction in interest rates, the average household is now in a stronger financial position and has more ability to service its debt in the event of an emergency. Meanwhile, housing loan deferrals have fallen by 95% from their peak in June last year and now account for just 0.7% of the total stock of loans.
Even so, we think that financial stability risks will come back onto the radar in the months ahead. For one thing, while housing credit growth remains low, it has now started rising. Indeed, the strength in housing finance commitments suggests that it could
soon reach the highest level since the GFC. While the RBA has claimed that some of that strength is driven by HomeBuilder grants encouraging building, housing finance commitments excluding those for construction of a new dwelling are also at their highest level since the GFC. That means that housing credit growth will accelerate even after the Homebuilder scheme was ended on 31st March.
Higher credit growth isn’t necessarily a problem unless accompanied by looser lending standards And APRA and the RBA are still comfortable with lending standards. We tend to agree. But survey evidence suggests that banks are extremely keen to lend. (See Chart 3.) If that eagerness spills over to housing loans, the quality of lending could start to fall.
That may force APRA back into action. In our latest Outlook, we have therefore pencilled in a modest decline in house prices next year. That’s one reason why we think the RBA will be in no rush to tighten policy and will leave rates on hold until late 2023.
