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Regulators’ loan caps have thwarted risk of credit crunch

by Lewis Panther SA FIN | 15 Nov 2018

Banks’ aversion over lending to developers because of house price drops is a greater risk to the economy than homeowner debt.

That was the underlying message from Reserve Bank of Australia Deputy Governor Guy Debelle when he spoke at FINSIA’s signature event The Regulators.

But the government advisor is confident measures implemented by the bank and its regulatory partners at APRA and ASIC over the past four years have been successful in staving off a runaway surge in the type of precarious interest-only loans that could have seen the market boil over and risk a “sharp unwinding”.

Debelle told delegates: “I don't see the riskiness of the borrowing as being the source of the negative shock.

“I don't regard it as likely that household borrowing will collapse under its own weight.”

But, he admitted: “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. 

“This would have first order consequences for the economy and hence also for monetary policy.”

But the economist doesn’t see that happening.

While tighter requirements have seen investor lending reduce to a point where it’s barely growing and loans to occupiers has slowed, growth still stands at five per cent.

“I haven't seen a credit crunch when lending grows at 5 per cent before,” he said.

When taking questions from the floor, he said the RBA, APRA and ASIC had all been concentrating on the resilience of the household balance sheet.

“The measures that have been introduced by APRA and ASIC increase our ability be more confident about the resiliency of the household balance sheet,” he said.

“So I am much more confident about being able to achieve our goals going forward.”

Though he did sound a warning about he impact on the slump in houses prices having a knock-on effect for business.

He said: “While not directly related to the housing measures, there has been some tightening in credit for developers of residential property. 

“This reflects lenders' reducing their desired exposure to dwelling construction, which is higher-risk lending, particularly given the longer planning and construction lags of higher density dwelling construction. 

“That is, banks are less willing to lend given the fall in prices. 

“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. 

“There is a risk that this process overshoots leading to a sharper or more protracted decline in activity than we currently expect.

“The effect of a tightening in lending to developers seems to me to be a higher risk to the economic outlook than the direct effect of the tighter lending standards on households, which has ameliorated risk. 

“Relatedly, there may also be a bigger impact on lending to small business given the extensive use of property as collateral for small business loans. 

“This would be further exacerbated if the banks' risk appetite for small business lending declines for other reasons.

“Housing prices have fallen by almost 5 per cent from their late 2017 peak while the pace of housing credit growth has slowed over the past couple of years. 

“The fall in housing prices is a combination of a number of other factors, including the very large increase in the supply of houses and apartments both now and in prospect. 

“It also reflects a reduction in foreign demand, which has been affected by a tightening in the ability to shift money out of China and an increase in stamp duty in some states.”


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