The Reserve Bank of Australia is mulling over it's responsibility to guard the citizens of this country against what is shaping up as an unprecedented housing price bubble. Every weekend sees home prices rising to new heights and auction clearances are nothing short of a bidding frenzy.
Half a century ago the loan formulae for new home buyers was fairly strict. The lending authorities required buyers to have at least a ten percent deposit and the monthly loan repayments should not exceed a third of that persons income, and the preferred loan length was twenty years.
Economists at the bank are aghast that the deposit gap is ever narrowing and the loan length ever increasing - and even with interest rates at a historic low - many people are committing an unsustainable portion of their income to servicing their home loan.
One of the options being considered by the Reserve bank is to impose a new requirement for lowering the deposit ratio to under 90% of the loan and requiring the borrower to prove that a rate rise of between 3 and 4 % would be sustainable within their earning capacity. They could also impose new capital holding rules on the banks to force them to gear the cash they must retain to a direct link with their home loan portfolios. This would sharply curtail the banks ability to make home loans more widely available.
This would certainly slam the door shut on most moderate income home loan applicants - and would probably pop that price bubble. It could in fact send the momentum into reverse and cause a dramatic - and dangerous - fall in house prices, with disastrous repercussions for the Australian economy. People who have recently entered the home market with a minimum deposit and unsustainable repayments could find themselves with a loan that far exceeds the new value of their home holding - as happened in the 2008 recession.
It could also throw the entire Australian economy into a tailspin. The same criteria that existed before 2008 is evident in many people's minds. There is an expectation that house prices will continue to rise and therefore even a short holding will result in a profit. It is the old game of "Musical Chairs " - and if the Reserve bank implements these proposed changes - it will be the moment that the music stops !
The Reserve bank is wrestling with a moral responsibility. It is inevitable that interest rates will not remain at their present low level and when they rise a lot of people will be in dire financial trouble. Even a hint of bank foreclosures will spook the market and see home prices tumbling - and people slam their wallets shut and stop spending. That is precisely the situation that sparks off a recession - and that can quickly mushroom through the entire economy.
On the other hand, to let the present situation remain unchecked is to knowingly place decent people in jeopardy by allowing banks to fund unsustainable home purchases. It is the duty of the Reserve bank to guard against such risks, but in doing so it could trigger an even greater calamity if it saps public confidence by implementing harsh measures.
This public warning is probably intended to put a shot across the bows of the banks and warn them to modify their deposit and repayment ratios to a more sustainable level. A word in the ears of those at high level in the banks may see a tightening of the criteria, but at a level which simply slows home price increases and lowers a frenetic market to a more reasonable tempo.
The Reserve bank has draconian powers at it's disposal. It seems to be choosing the " softly Softly " approach to ease an overheated housing market back to a sustainable level, without creating what could be termed " unintended consequences " !
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