Housing-fuelled household debt remains a worry, says RBA's Michele Bullock

Michele Bullock, the RBA assistant governor, says the central bank is carefully monitoring the high levels of household debt fuelled by by rising house prices and low interest rates and regulators are looking to mitigate some of that high-risk lending areas through prudent steps.

Speaking at "Where to from here?", a panel discussion hosted by Lander & Rogers and Westpac, Bullock said the core focus of the RBA was financial stability.

She made her point by addressing the issue of the resilience of banks and the resilience of households.

Bullock said APRA's prudent steps such as putting a "speed limit" on lending to investors had a definite effect on prices but that the housing market had started to rise again this year and further measures had to be taken such as capping interest-only loans at 30 percent.

She spoke about the increased oversight of APRA in monitoring the risks that banks were taking on. The purpose of these measures was "to bolster the lending quality of the banks so that the assets they had in these mortgages were well secured and lending was prudent,” she said.

Earlier this year, Bullock had said that the RBA was "prepared to do more if needed,” to check any risk from the housing market to the economy.

Back in 2014, lending to property investors was rising “very sharply” and this was an environment where house prices were rising… in Sydney and Melbourne particular, prices were rising about 20 percent annually” which was viewed as a systemic risk by the regulatory bodies.

She said it was possibly exacerbating demand, particularly for new apartments, and “all banks were increasing their exposure to housing” which meant that “if the market turned down, all banks would be affected”.

She pointed out that a substantial portion of lending was interest-only loans which was “a riskier type of lending because peopler aren’t reducing their loan-to-value ratios”.

In such a scenario, regulators had to act and said that no more than 30 percent of bank loans could be IO loans.

“Investors might be introducing more risk by exacerbating cycles in house prices, so if investors are chasing capital gains, they might be spurred on by rising house prices and then if any slowdown occurred that could affect sentiment and they could do the same on the downside,” she said. 

“It’s not their home, so they’re not going to be desperate to hang on to it, so if house prices decline, they might just get rid of it.”

Bullock said the risk from a property market decline would not only affect investors, but also owner occupiers. For owner occupiers the risk was because many were sitting on high debt, if prices fell, the value of their debt would be higher than the value of their property.

“House price per se isn’t the issue, it’s rather what the house price growth might be reflecting in behaviours and introducing risks in the sorts of debt and sorts of behaviours that people are taking on," said Bullock.

She said many households may have stretched themselves to get on the property ladder, while at the same time incomes weren't rising quickly.

“So you’ve got rising debt, rising quite quickly because house prices are rising so people are having to take on more debt but their incomes aren’t rising as quickly, so the debt-to-income ratio is actually rising,” which was a source of worry for the RBA.

On the bright side, though debt servicing was being supported by low interest rates at the moment but the question was "what happens if interest rates start to rise in these circumstances?”

She said that improved lending standards introduced by APRA such as asking banks to put in interest rate buffers…"so banks are assessing serviceability not only on the current interest rate people are paying but with an interest rate with a buffer in it, so about 7 percent as opposed to about 4 percent" was a confidence-building measure in the system.

"This would mean that households would have an increased resilience to increase in interest rates."

 Bullock also said that lots of households have buffers, such as offset accounts, redraw facilities, so they’ve “got a little bit of flex over how much they’re paying”.

"Also, the fact though average debt is high, a lot of debt is held by high income households, so that also gives us a little bit of confidence," but at the same time, high levels of debt does leave households vulnerable to shocks.

Bullock said that when interest rates do rise in Australia, they’re likely to impact consumption in a different sort of way, so this is something that the RBA will have to take into account.