More hints macroprudential is coming

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ScreenHunter_01 Mar. 22 09.40

By Leith van Onselen

Following the Reserve Bank of Australia’s (RBA) deliberations on Friday at the Parliamentary Committee, covered earlier today by Houses & Holes, more firm indications have emerged that the RBA is seriously considering implementing macro-prudential controls on mortgage lending.

Today, the RBA has released a bunch of reports under Freedom of Information (FOI), which suggests it is considering counter-cyclical interest rate buffers so that potential borrowers would need to be able to cope with larger increases in interest rates, effectively lowering the maximum amount that could be borrowed.

According to the RBA’s head of financial stability, Lucy Ellis:

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Other than avoiding an over-easing of monetary policy, the most promising policy response seems to be to introduce a regulatory regime that automatically requires larger interest buffers in loan affordability calculations when interest rates are low. This could be introduced either as a prudential measure or as part of the National Consumer Credit Code, or both…

Good practice would suggest that the difference between actual and qualifying interest rates should increase when actual interest rates are unusually low…Liaison suggests that many, if not all, lenders do this, but there is a case for doing more to ensure that interest rate buffers are countercyclical to actual interest rates…

The regulatory regime for consumer credit protection can also help lean against housing booms and related easings in lending standards. For example, the Australian code requires lenders to check that mortgage borrowers can repay the loan from their own resources without having to sell the property to do so. This deters purely asset-based lending, which is inherently speculative. It also prevents loan amounts being granted that are truly unaffordable to the borrower, including via excessively long loan terms.

Ellis also notes that reforms to tax arrangements could play a significant role in taming property booms and busts:

The prudential framework is not the only aspect of public policy that needs to be calibrated appropriately to reduce the risk of harmful property-related credit booms. As the Bank previously pointed out, tax systems can shape the incentives to engage in leveraged property speculation… [Investors are] no doubt also influenced by the relatively generous tax treatment of property-related investment expenses; the design of capital gains tax is also relevant. For all their other inefficiencies, high stamp duty rates do put some restraint on the scope for speculation by ‘flipping’ properties.

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While the RBA at Friday’s Parliamentary Committee raised concern that macro-prudential controls could adversely impact first home buyers (FHBs), I think it misses an important point.

For years, governments of all persuasions have effectively outsourced housing policy (and economic policy more generally) to the RBA rather than undertaking structural reforms.

If maximum loan sizes were reduced via macro-prudential, reducing the pool of available first home buyers, governments would be forced to act on the supply-side. Again, the RBNZ has shown the way here, issuing numerous stern public warnings to policy makers that they must address housing affordability front-on via reforms to its constipated planning and land-use systems, as well as pulling-back credit to higher risk borrowers (e.g. first home buyers) via its macro-prudential caps on high risk mortgage lending. In turn, the National Government has been given greater impetus to pursue its supply-side agenda, which it is pursuing with vigour.

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Put simply, if the RBA pushed responsibility for housing policy back onto the federal and state governments, they would be forced to act. This is an unmentioned but important benefit of macro-prudential, in addition to any financial stability benefits. Although, such an approach would obviously require the RBA to stop defending Australia’s expensive housing with self-defeating supply-side analysis.

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About the author
Leith van Onselen is Chief Economist at the MB Fund and MB Super. He is also a co-founder of MacroBusiness. Leith has previously worked at the Australian Treasury, Victorian Treasury and Goldman Sachs.