Bullock says RBA 'prepared to do more' to curb risks in housing market

RBA Assistant Governor Michele Bullock has sounded a caveat, saying the essence of macroprudential policy lay in recognising potential system-wide risks and reacting accordingly, implying the bank and APRA could further tighten lending rules to contain buildup of potential risks from a runaway housing market.

“We are continuing to monitor their ongoing effects and are prepared to do more if needed,” she said at a speech during an event organised by financial news service Bloomberg.

Her speech ‘Has the way we look at financial stability changed since the GFC?’ looked at the history of the RBA’s role since it was formed to the way it monitors the financial system now in the aftermath of the global financial crisis in 2008.

“At the big picture level, the way we look at it hasn't changed that much. But we are even more attuned to the tail risks than we were and more attuned to the need to take action if we sense that the risks are building,” she said.

Her words come amid concerns of property prices picking up sharply and the steps taken by the Australian Prudential Regulation Authority to cap investor lending not having the desired effect after an initial slowing of growth.

The OECD recently warned that a crash in Australia’s housing market could plunge the country into depression.

She stated that the central bank’s mandate was “to ensure that financial disturbances in any part of the financial system do not ultimately threaten the health of the economy”. 

Coming back to the question at how GFC has changed its outlook towards financial stability, Bullock said, “It hasn't fundamentally changed the way think about financial system stability, though we now have a deeper understanding of the nature of the risks and the potential channels of contagion.” 

She added that the bank had “also built significant capacity to better monitor risks both in the banking and non-bank sectors”.

“The experience with losses in commercial property in the late 1980s, the collapse of HIH in 2001 and the housing boom in the early 2000s perhaps made Australian regulators a little more circumspect. APRA had therefore maintained a strong supervisory focus on the Australian financial institutions.”

She cited that APRA reacted to the risks that were building in the housing market in 2014, especially from investment lending, but putting in place an annual 10 percent cap on growth in investment lending for banks.

“There was very strong demand for residential housing loans, particularly by investors. Price competition in the mortgage market had intensified and discounts on advertised variable rates were common. There also seemed to be a relaxation in non-price lending terms. The share of new loans that were interest only was drifting up and the growth of lending for investment properties was accelerating. Unsurprisingly in this environment, the growth in housing prices was strong, particularly in Melbourne and Sydney.”

“The regulators judged that more targeted action was needed to address the risks – to put a bit of sand in the gears.” 

“So APRA indicated that it would be alert to annual growth in a bank's investor housing lending above a benchmark of 10 per cent. It also set some more prescriptive guidelines for serviceability assessments and intensified its scrutiny of lending practices.”

“ASIC also undertook a review of lending with a focus on whether lenders were complying with responsible lending obligations.”

But while the measures worked for a time, “the resilience of both borrowers and lenders has no doubt improved…” and “the initial effects on credit and some other indicators we use to assess risk may fade over time.”