The Reserve Bank of Australia has fired a stern warning at mortgage lenders, knowing any change to interest rates is a risk to fragile economic growth.
The central bank held its benchmark interest rate steady at a record low of 1.5 per cent at its April board meeting on Tuesday, in line with the forecast in an survey of 12 economists.
RBA governor Philip Lowe is concerned soaring housing prices are pushing up the household debt to income ratio – which he said was already at a record high earlier this year.
Dr Lowe told the RBA Board Dinner on Tuesday night that the bank has been concerned about rising household debt for some time, and the country’s leading financial regulators have been discussing it at length.
“Too many loans are still made where the borrower has the skinniest of income buffers after interest payments,” he said.
“In some cases, lenders are assuming that people can live more frugally than in practice they can, leaving little buffer if things go wrong.”
In his most strongly-worded statement on the mortgage market in recent memory, Dr Lowe said lenders need to ensure the serviceability metrics they use are appropriate for current conditions.
He also called for a reduced reliance on interest-only housing loans in the Australian market.
Almost 40 per cent of mortgages approved in the past year have not required the scheduled repayment of even one dollar of principal in the first years of the loan, only interest payments, which unusual by international standards, Dr Lowe said.
He welcomed the Australian Prudential Regulation Authority’s new limit on interest-only loans to 30 per cent of new mortgage lending, and monitoring of lenders and mortgage brokers by the Australian Securities and Investment Commission.
“A reduced reliance on interest-only loans in Australia would be a positive development and would help improve our resilience,” Dr Lowe told the RBA Board Dinner.
“With interest rates so low, now is a good time for us to move in this direction.”
JP Morgan economist Sally Auld said the RBA issued its warning because an interest rate hike could curtail household spending, which currently is propping up patchy economic growth.
Fresh data shows unemployment worryingly ticked up to 5.9 per cent in February and retail spending had fallen 0.1 per cent.
Ms Auld said it seemed like the central bank’s assertion that the economy would achieve three per cent growth over the next two years was no longer the key message.
“Indeed, the three per cent forecast was removed from the March RBA Statement, and today’s comment on growth was limited to the observation that ‘Recent data are consistent with ongoing moderate growth’,” she said.
The Australian dollar dropped dramatically after the RBA’s interest rate decision, falling from just above 76 US cents to 75.6 US cents in late afternoon trading – its lowest level since mid-March.
Commonwealth Bank economist Gareth Aird said the RBA remains unlikely to tamper with interest rates as it tries to balance financial stability with sustainable growth.
“The competing forces of below target inflation and soft employment growth against rampant property markets in Sydney and Melbourne mean policy is on hold for the foreseeable future,” he said.