RBA too late the hero on mortgage risks (members)

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By Leith van Onselen

The Reserve Bank of Australia (RBA) has provided its second submission to the Murray Financial System Inquiry (FSI), which reportedly warns against moves to bolster competition in the mortgage market for fear that it would pump even more funds into property and heighten financial system risks.  From Business Spectator:

“The supply of mortgage finance in Australia is ample,” the RBA said. “Therefore, any proposed policies that could further increase that supply should be subject to rigorous analysis of their costs, benefits to consumers and risks to financial stability.”

The interim report from the inquiry’s panel, led by former Commonwealth Bank boss David Murray, raised a number of options to boost mortgage market competition, which the RBA stressed may result in a heavier lending bias towards housing, to the detriment of the broader economy.

“These options should be assessed in terms of the end benefits and risks for consumers and the broader economy,” the submission read.

“Relevant considerations include whether the policy change might accelerate household borrowing, and the associated implications for systemic risk and the available funding for Australian businesses”.

The RBA is of course correct. Further increasing the availability of credit would do what it has always done: raise household debt and bid-up house prices even further, while potentially also crimping lending to productive businesses. It would be a retrograde step and further reduce housing affordability while increasing financial stability risks.

That said, one does wonder why the RBA has taken until now to speak out about this issue. The proportion of bank loans going housing has been rising and is at an historical high, whereas the share of loans to business is at an historic low (see next chart).

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Moreover, the ratio of outstanding mortgage debt to household disposable income is at an historical high:

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And is rising fast as outstanding mortgage credit growth – 6.4% in the year June 2014 – far exceeds the growth in wages (2.6%).

Blind Freddy can see that Australia already has a mortgage problem, yet you would hardly know it from the actions and mutterings from the RBA.

All of which also makes the RBA’s opposition to macro-prudential controls of high risk mortgage lending – which Glenn Stevens has previously refered to as “dreaded macroprudential tools” and “the latest fad” – all the more delinquent.

Also in the second submission to the Murray Inquiry, the RBA stated the following about macro-prudential (via Banking Day):

The Reserve Bank of Australia “concurs with the Interim Report’s caution regarding unproven macroprudential tools”…

“The bank and the other agencies view macroprudential policy as being subsumed within the broader financial stability policy framework in Australia”…

APRA “has adapted its prudential intensity in light of developments in systemic risk”…

“For example, following signs of increased risk appetite in the mortgage market, APRA recently surveyed mortgage underwriting standards, released guidance on managing mortgage risk, and asked the major banks to specify how they are monitoring lending standards and the ensuing risks to the economy.”

I’m sure the banks are terrified!

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