Government brushes aside RBA’s debt blowout warning

April 13 2021
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The government said it is not concerned about the RBA’s warning that the financial system could be rocked if there’s a debt blowout, in fact it is “very pleased” that confidence levels are leading to a “strong housing market”.

Government brushes aside RBA’s debt blowout warning

Last week, the Reserve Bank of Australia (RBA) warned that optimistic borrowers could lead to a debt blowout, rocking the financial system.

“Even if lenders do not weaken their own settings, increased risk-taking by optimistic borrowers could see a deterioration in the average quality of new lending. This would weaken the resilience of businesses and households, and so the financial system, to future shocks,” the RBA said in its Financial Stability Review.

But when questioned about the government’s opinion, Assistant Treasurer and Minister for Housing Michael Sukkar told the media that not only is the government not worried, “we’re very pleased”.

“From our perspective, we’re very pleased that confidence levels and the strength of the economy and the unemployment rate are leading to a strong housing market where first home buyers are at 15-year highs, where owner-occupiers are in a very dominant position in the housing market,” Mr Sukkar told Sky News over the weekend.

He drew comparison with what pundits were saying at the onset of COVID when economists at major banks were suggesting “we could see 30 per cent reductions in the value of house prices”.

“If you look at the Housing Industry Association affordability indexes, which look at house prices, they look at wages, they look at serviceability costs with, most notably, interest rates.

“On average, we’re looking at affordability being at 20-year highs, which is why first home buyers are at such high levels and why owner-occupiers are nearly three-quarters of the market,” Mr Sukkar explained.

The reason owner-occupiers are in “an absolutely dominate position”, Mr Sukkar said, is because over $220 billion has been saved by business and households during the pandemic.

“A lot of that $220 billion is now finding its way into people investing in housing, again one of the reasons why first home buyers are at such a high level,” Mr Sukkar said.

The Minister for Housing did, however, admit that the government is keeping “a very close eye on these things, and in the end, we want as many Australians as is possible to be able to purchase their first home if that’s what they aspire to do”.

But despite the Minister’s confidence, market pundits have said that the RBA and APRA could start taping the lending standards’ brake in the months ahead.

In a recent market outlook, AMP Capital’s chief economist, Shane Oliver, predicted that in the absence of intervention and given current conditions, property price growth could run for another 18 months, with prices rising by a further 20 per cent or so.

“While they don’t target house prices, past experience indicates that surging house prices lead to a deterioration in lending standards and increasing financial stability risks, so it makes sense to start taping the lending standards’ brake soon,” Mr Oliver said of the RBA and APRA.

However, one buyer’s agent is not sure intervention should occur.

“The majority of the buyers entering the market are home buyers. It’s important to recognise that this roar in the market is also seeing many people become home buyers. Our home ownership rate at just over 65 per cent is lower than many countries around the world, and home buyers getting among it is a positive outcome, as investor credit growth, while improving, still lags home buyers considerably,” InvestorKit’s Arjun Paliwal said.

Opining that “housing affordability is a flawed topic”, Mr Paliwal said that any intervention would “simply skew the forces of demand and supply”, which would stem confidence.

“Boom, busts and flat periods are a part of our investing lives.

“What should be watched is the standards of our credit policies ahead and the take-up of highly leveraged loans, with responsible lending changes there are many grey areas,” Mr Paliwal concluded.

About the author

Maja Garaca Djurdjevic

Maja Garaca Djurdjevic is the editor of nestegg and Smart Property Investment. Email Maja at [email protected]

About the author

Maja Garaca Djurdjevic

Maja Garaca Djurdjevic is the editor of nestegg and Smart Property Investment. Email Maja at [email protected]

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