Regulators prepare to tighten lending as RBA holds rates near zero

RBA Governor Philip Lowe has hinted that loan serviceability buffers could be increased as households take on more debt to get into the booming market.

In its monthly board meeting the Reserve Bank on Tuesday held interest rates at a record low of 0.1%, where they’ve remained since November 2020.

Mr Lowe reiterated the board wouldn’t raise rates until inflation is sustainably higher, which isn’t expected until 2024.

“[The board] will not increase the cash rate until actual inflation is sustainably within the 2 to 3% target range. The central scenario for the economy is that this condition will not be met before 2024,” Mr Lowe said in a statement.

The prospect of low interest rates for years to come have driven property prices sharply higher, and financial regulators, – including the RBA – have expressed concerns over rising household debt.

“Housing credit growth has picked up due to stronger demand for credit by both owner-occupiers and investors,” Mr Lowe said.

“The 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.

“In this environment, it is important that lending standards are maintained and that loan serviceability buffers are appropriate.”

The Council of Financial Regulators, which Mr Lowe chairs, last week indicated it was getting ready to act, and was in discussions with the banking regulator APRA on the “implementation of any particular measure.”

Borrowing activity has accelerated as people take on new and bigger home loans to keep up with soaring property prices, with RBA data showing housing credit growth rose 6.2% over the year to August – almost double that of a year ago.

Credit growth measures the change in outstanding home loan balances by calculating the amount households borrow, and how much is being repaid.

Lending data from the Australian Bureau of Statistics released Friday showed $30.76 billion worth of new home loans were issued in August, up 47.4% compared to a year ago.

Borrowers are also taking on larger loans to keep up with surging house prices, with the average mortgage up 16% or $80,000 over the past year.

Lending curbs could be just months away

Speculation has been building over the timing and types of lending restrictions regulators could implement.

Economist at realestate.com.au Paul Ryan expects lending curbs could be reintroduced within the coming months.

“The way that they’ve communicated, it seems like a foregone conclusion,” Mr Ryan said.

“It could be by the end of this year but there’s a possibility it will be early next year as well.”

A rising number of high debt-to-income (DTI) loans has raised expectations that high-debt borrowers could be targeted.

“I would guess that they would implement a strict benchmark on high-debt borrowers, so a high debt-to-income (DTI) limit, which will probably be high DTI as a share of new lending rather than old,” Mr Ryan said.

Recent figures from APRA show 22% of new mortgages issued in June had a debt-to-income ratio greater than six – which is where debt is greater than six times a borrower’s income. This was up from 16% a year earlier.

“They might make that limit 20% or maybe as low as 15%, which was the level that’s pretty much persisted since the data started in mid 2019,” Mr Ryan said.

Mr Ryan said the most effective measure would be raising the serviceability floor, or buffer rate, banks use to assess whether a customer will be able to make repayments should interest rates rise.

Currently, lenders are required to assess whether borrowers could still meet their repayments on an interest rate that is either 2.5% higher than their actual rate, or the floor rate set by the bank, whichever is higher.

“Interest rate buffers have the largest effect because they affect all borrowers,” Mr Ryan said.

“The serviceability tweaks are a much more effective policy here but they send less of a signal because it’s harder for people to understand how serviceability buffers translate into more resilient borrowers and the resilience of the system.”

Further analysis on the risks of rising household debt will be released this Friday in the RBA’s Financial Stability Review.