RBA shies away from macroprudential housing policies, but microphone at the ready

The RBA's head of financial stability Luci Ellis has repeated the view that Australia's central bank won't be introducing ‘‘macroprudential’’ policy restrictions on higher-risk lending in order to preserve financial stability.

Despite limits on loans with high loan-to-valuation ratios being introduced in Canada, Sweden, Norway, Israel, Korea and Hong Kong, Ellis defended the RBA's caution.

‘‘We view macroprudential policy as something to be subsumed into the broader financial stability framework,’’ Ellis said in a speech to the University of Adelaide Economics Department.

“We recognise that quantitative restrictions were already tried in the 1960s and 1970s – and didn’t always work so well.

‘‘The division between ‘microprudential’ supervision, narrowly focused on individual institutions, and system-wide ‘macroprudential’ supervision, never made much sense to us in Australia.’’

Ellis stressed the central bank’s tools for promoting financial stability were the ‘‘telephone’’, a reference to calling APRA and raising concerns, and the ‘‘microphone’’, a reference to the RBA's public comments.

"Exposing and warning of risks can ideally change behaviour, and steer the system away from higher-risk outcomes," she said.

Her speech follows last week’s warning from APRA which unveiled new draft guidelines on how to manage risks in the mortgage market.

Ellis said APRA and the RBA were already well equipped to promote financial stability.

‘‘The rationale for carving out particular bits of the prudential framework under separate governance – which is what people mean nowadays by ‘macroprudential tools’ – appears to be that supervisors cannot be relied on to discharge their duties with system-level concerns in mind,’’ she said.

‘‘That might be true in some countries, but not in Australia and at least some other countries.’’

In framing the objectives of financial stability policy, Luci Ellis noted whenever housing prices boomed people worried that housing has become unaffordable.

"Of course, if prices are rising, it must be that someone can afford those prices.

"If they are motivated by speculative expectations, though, prices can run ahead of levels that can be sustained in the longer term.

"So there can be a financial stability angle to those concerns, if a future fallout is likely to harm the real economy, either directly or via distress in the financial system.

"But the real policy concern here is that other people get priced out.

"It is fundamentally a question of distribution, particularly intergenerational distribution.

"This is not in the remit of financial stability policy, and the two goals should not be conflated.

"But we should be mindful of this equally legitimate goal of public policy, which is to ensure that everyone can access appropriate shelter that they can reasonably afford.

"Sometimes this goal mutually supports the goal of financial stability.

"But as we saw in the US housing meltdown, if you get the policy response to an affordability issue wrong, the consequences for financial stability can be dire," she outlined.