Record low interest rates and government housing support programs have helped push Australian house prices above pre-pandemic levels. Price appreciation is also strong, with all capitals and regional markets posting double-digit annualised price growth.
This has led to speculation that tighter bank lending standards and other so-called macro-prudential regulations are being considered by regulators.
The International Monetary Fund (IMF) has thrown its hat into the ring, stating that tighter lending rules are needed to prevent the possible negative impact of high household debt resulting from the record low rates:
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IMF analysts Adolfo Barajas and Fabio Natalucci said in research released overnight that central banks and regulators faced a dilemma, as low interest rates helped the economy but also increased the amount of debt…
“Macro-prudential tightening can mitigate downside risk to growth, thus alleviating the key policy tradeoff,” they said.
“Furthermore, if policymakers loosen financial conditions via monetary policy but also concurrently tighten macro-prudential tools, medium-term downside risks to economic activity can be mostly contained.”
We obviously agree with the IMF’s assessment; MB has championed for macro-prudential tools since 2012.
The major issue preventing macro-prudential tools from being implemented in Australia is that:
- The property boom is being driven by owner-occupiers (particularly first home buyers), rather than speculative investors; and
- Australian household debt is barely growing, and falling as a share of income and GDP.
The second point is especially important. While new mortgages are being taken out at a record pace, existing mortgages are also being repaid quickly. Hence, the mortgage debt-to-income ratio has actually fallen, as revealed last week by the ABS:
Personal debt is also falling:
This means that the ratio of household debt to income in Australia has also likely fallen sharply.
The upshot is that record low interest rates does not necessarily mean that financial stability risks as they pertain to households is rising. Quite the opposite, in fact, as the lower rates on offer makes repaying the stock of outstanding debt easier.
Hence, APRA’s reluctance to rein-in the property boom using macro-prudential tools.