RBA warns banks over mortgages

In a speech on Friday to the 2014 Economic and Social Outlook Conference in Melbourne, RBA head of financial stability Luci Ellis said the claim that “banks are becoming glorified building societies, lending for mortgages and not much else” is a claim that should be taken seriously.

While she noted that banks in other countries hold less capital against mortgages than Australian lenders, Ms Ellis argued that Australia’s prudential framework could be more conservative.

“It could perhaps be argued that Australia should go further and be even more conservative in its treatment of housing finance,” she said.

“That would, of course, make mortgages more expensive and less available than they otherwise would be.

“Whether and how far to go in this direction is something the Financial System Inquiry may want to examine.”

Ms Ellis’s comments come after RBA governor Glenn Stevens warned property investors to “take care in the Sydney market”.

In a speech to The Econometric Society Australasian Meeting and the Australian Conference of Economists in Hobart on Thursday, Mr Stevens said there has been a large increase in borrowing for investment property in the Sydney area.

“The total value of credit approvals for investor loans in New South Wales as a whole is about 130 per cent higher than in 2008, and it is in the investor segment where there has been evidence of some increase in lending with loan-to-value ratios above 80 per cent in the past couple of quarters,” he said.

Mr Stevens issued two key messages from this observation.

“The first is that in forming expectations about future price gains and deciding their financing structure, people should not assume that prices always rise,” he said. “They don't; sometimes they fall.

“The second is that banks and other lenders need to maintain strong lending standards.”