Australian Treasurer Josh Frydenberg has met with regulators over the need for plans to address the ballooning levels of household debt.
Last Friday, Frydenberg spoke about the current state of the housing market with the Council of Financial Regulators, chaired by the Reserve Bank of Australia (RBA) governor Philip Lowe and which members include the Australian Prudential Regulation Authority (APRA), Australian Securities and Investments Commission (ASIC), and Treasury.
No immediate decision to crackdown lending was made despite the mounting concerns for high-debt home loans.
Sustained record low-interest rates have contributed to a strong growing housing market driven by owner-occupiers rather than investors.
“With Australia’s economy well positioned to strongly recover as restrictions ease, it is important to continually assess the appropriateness of our macro-prudential settings,” Frydenberg told The Australian Financial Review.
“We must be mindful of the balance between credit and income growth to prevent the build-up of future risks in the financial system,” he said.
Data from APRA found that in June 2021, 22 percent of new residential mortgage loans were more than six times higher than the borrower’s income, up from 16 percent one year earlier.
Borrowers of high debt-to-income loans are at greater risk of experiencing a shock once interest rates are lifted, or other economic situations occur.
“Carefully targeted and timely adjustments are sometimes necessary,” Frydenberg said. “There are a range of tools available to APRA to deliver this outcome.”
Frydenberg’s comments come after the International Monetary Fund (IMF) raised concerns about housing affordability and the financial stability of Australian households.
“High debt-to-income mortgages are on the rise amid elevated household debt, and investor demand has begun to increase from low levels,” the IMF said. “Lending standards should be monitored closely, and macroprudential measures should be employed to address incipient risks.”
“Options include increasing interest serviceability buffers and instituting portfolio restrictions on debt-to-income and loan-to-value ratios.”
Commonwealth Bank CEO Matt Comyn echoed the warnings of the IMF, telling the House Committee on Economics on Sept. 23 that while he was not concerned about the current state of the market, regulatory action should be taken.
“If we look at the simple numbers and the relative growth rate of housing over the last 12 months, I am not concerned per se about the period just gone,” Comyn said. “But in terms of increasing housing debt and increasing house prices, we are increasingly concerned.
“We think it would be important to take some modest steps sooner rather than later to take some of the heat out of the housing market.”
The RBA has also firmly maintained its stance on retaining current record-low interest rates to support the rest of the economy on its road to post-COVID-19 recovery.
“While it is true that higher interest rates would, all else equal, see lower housing prices, they would also mean fewer jobs and lower wages growth,” RBA governor Lowe said. “This is a poor trade-off in the current circumstances.”