Regulators keeping an eye on household debt

By Gerv Tacadena

Regulators are likely to roll out policies targeted to highly indebted borrowers should the boom in the property market cause serious risks to financial stability.

Regulators are likely to roll out policies targeted to highly indebted borrowers should the boom in the property market cause serious risks to financial stability.

Reserve Bank of Australia assistant governor Michelle Bullock said while the strong housing market has been a positive aspect for the economy, the resulting sustained growth in credit that goes beyond income could result in vulnerabilities.

"Unlike in 2014 and 2017, the concerns this time are not specific types of lending such as investor or interest only lending," Ms Bullock said.

"This suggests that if there were to be a need for so-called macro-prudential tools to address rising risks, they should be targeted at the risks arising from highly indebted borrowers."

Tools that address serviceability of loans and the amount of credit that can be obtained by individual borrowers are, Ms Bullock believes, more likely to be relevant in the current context of the market.

“A high level of debt could pose risks to the economy in the event of a shock to household incomes or a sharp decline in housing prices,” she said.

“It is these macro-financial risks that warrant close watching. Whether or not there is need to consider macro-prudential tools to address these risks is something we are continually assessing.”

What could trigger tighter lending policies?

CoreLogic research director Tim Lawless shared similar insights on the matter, adding that while investment credit growth has increased, it remained below average.

"On the other hand, owner occupier credit growth has been trending higher since June 2020 and has remained above the decade average since November last year," Mr Lawless said.

Data from the Australian Prudential Regulation Authority (APRA) show that 22% of lending during the June quarter was for housing loans with debt-to-income ratio greater than six times.

Mr Lawless said while there is a reduction in household debt levels since the recent peak in 2019, the ratio of household debt to annualised disposable household income edged higher during the first quarter of the year.

"Considering the pace of growth in housing credit against a backdrop of soft income growth, in all likelihood, household debt — of which housing debt is the primary component — will be at or close to record highs by the end of 2021," he said.

What the likely response would be

Mr Lawless said there could be higher serviceability assessments for borrowers to address these risks.

"This means essentially raising the minimum interest rate used when assessing whether a borrower can service their loan," he said.

"Or portfolio level restrictions could be imposed on lenders, probably focussed on establishing firm benchmarks on the proportion of high debt-to-income ratio loans that can be issued."

These options would have an impact on credit availability and would likely limit the loan size relative to the borrowers' income and servicing ability.

Mr Lawless said these stricter credit conditions, if introduced, will result in lesser home purchasing activity.

Furthermore, it will add to the headwinds of worsening housing affordability, higher levels of newly built supply, and stalled overseas migration.

"Of course, the tailwind of persistently low mortgage rates and improving economic conditions once lockdowns are eased or lifted will help to keep a floor under housing demand," he said.

Photo by Mikhail Nilov from Pexels

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