The Reserve Bank’s deputy governor is confident the Australian economy will not collapse under the weight of record household debts, although he has acknowledged it could exacerbate any future downturn.
Speaking at a regulators’ lunch in Melbourne, Guy Debelle said the main consequence of very high household debt was reducing financial resilience.
“I don’t regard it as likely that household borrowing will collapse under its own weight,” he said.
“Rather, if a negative shock were to hit the Australian economy, particularly one that caused a sizeable rise in unemployment, then the risk on the household balance sheet would magnify the adverse effect of that shock.”
Dr Debelle’s speech was about “assessing the effects of housing lending policy measures”.
Over recent years, these measures have included tougher assessments of potential borrowers’ repayment capacity, a 30 per cent cap on interest-only loans as a share of all lending, and a 10 per cent limit on investor lending growth.
“The available evidence suggests that the policies have meaningfully reduced vulnerabilities associated with riskier household lending and so increased the resilience of the economy to future shocks,” Dr Debelle argued.
The RBA deputy governor said interest-only lending fell from 40 per cent of new loans near the peak of the boom in March 2017 to 17 per cent by September of that year, and has remained at about half of the 30 per cent cap since then.
“As a result of switching and weaker growth of investor lending, we estimate the share of housing loans to investors has declined by 5 percentage points to around one third,” Dr Debelle added.
“Interest-only loans currently comprise 27 per cent of the stock, having been as much as 40 per cent.”
With banks raising interest rates for those on interest-only loans and refusing to roll over many of this type of loan, instead asking borrowers to switch to principal and interest, many property owners are facing a significant increase in repayments, often close to 40 per cent.
However, Dr Debelle said many interest-only borrowers have already switched over to principal and interest loans and appear to be coping with the higher repayments.
“Based on the experience to date, I don’t see this is a material risk, particularly given the current favourable macro [economic] environment,” he said.
Major banks’ share of new lending lowest in a decade
The Reserve Bank is also relatively sanguine about the decline in borrowing capacity triggered by tougher loan application processes and lending criteria.
Dr Debelle said, under the old looser lending standards, banks offered many borrowers far more debt than they were willing to accept anyway.
“Now they are willing to lend you less on average, by around 20 per cent,” he observed.
“How much impact this actually has in aggregate depends on how many people are now constrained by this lower maximum loan size that weren’t previously.
“Using data from the HILDA survey, we estimate that the share of borrowers who are near their maximum loan and so are affected by this change is small, though for those who are constrained the effect can be quite large.
“Our assessment is that the aggregate impact is less than it would appear on the face of it.”
One observed effect of the tougher lending standards at banks has been a shift in customers towards less heavily regulated non-bank lenders.
“Currently the major banks’ share of new lending is at its lowest in a decade,” Dr Debelle said.
“Non-ADIs’ [authorised deposit-taking institutions] housing lending has been growing rapidly, over twice the rate of growth of ADIs.
“As a result, the estimated non-ADI share of housing credit has also increased, although it remains less than 5 per cent of the total.”
One risk Dr Debelle did acknowledge was that less investor demand might start drying up property development, which could significantly push down construction and related employment.
“To the extent that the housing policy measures have contributed to the decline in investor demand and prices, they have indirectly affected developers’ access to finance,” he noted.
“There is a risk that this process overshoots, leading to a sharper or more protracted decline in activity than we currently expect.”