RBA admits that the current crackdown could eventually result in an economic crunch

The Reserve Bank of Australia (RBA) seemed to have changed its tone regarding stricter lending rules: it now admits that the current crackdown could eventually result in an economic crunch.

In a think piece on News.com.au, economist and industry expert Jason Murphy said the central bank appears to be anxious about the dwelling supply.

"Holding everything else constant, the more houses there are for sale, the cheaper they should be. This is simple supply and demand. The pipeline of new homes should be exerting downward pressure on prices. I thought the RBA might be pleased the pipeline would soon go from gushing to trickling," Murphy said.

However, it seemed like the opposite is true — in fact, RBA deputy governor Guy Debelle said in a recent speech that tighter lending standards might escalate the downturn in the apartment markets, especially if off-the-plan buyers would not be able to obtain financing.

“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,” Debelle said.

Murphy explained that the problem lies with the economy not being able to stop construction even if the housing market is already in an oversupply.

"If developers can’t borrow money upfront to build with, all those hard hats will be in the back of the ute, instead of being used on sites. Lots of construction industry workers out of work would be very bad news for the economy," he said.

For RBA, it seems like the stricter lending rules actually played a hand in this dilemma. Citing Debelle, Murphy said the decline in investor demand has indirectly affected developers' access to finance. In this case, RBA could consider relaxing the rules on lending.

"Not because they want house prices to go up as an end in itself — but because they want to keep construction employment from crashing," Murphy said.

However, there is still a possibility that RBA's recent sentiment was just misinterpreted and that it is totally relaxed about home values falling in the long run.

"It wants a huge pipeline of supply. They are eager for even more housing to get built. If this is the case they seem to be signing us up for even more house price falls," Murphy said.