RBA changes its tune on investor lending

Addressing the Committee for Economic Development of Australia (CEDA) Annual Dinner in Melbourne on Tuesday, Mr Stevens said it should not to be assumed that investor activity is problematic, per se.

“A proportion of the investor transactions are financing additions to the stock of dwellings, which is helpful,” he said.

“It can also be observed that a bit more of the ‘animal spirits’ evident in the housing market would be welcome in some other sectors of the economy.”

Mr Stevens stressed that the investor lending dynamics are not an immediate threat to financial stability.

“The bank's most recent Financial Stability Review made that clear,” he said.

“So we don't just assume that all this is a terrible problem.”

The central bank governor’s language was markedly different from that used in the Financial Stability Review, where he stated that the “main risk” of strong investor activity is that extra demand may “intensify the housing price cycle” and “increase the potential for prices to fall later”.

In the FSB, released in September, the RBA said the composition of housing and mortgage markets “is becoming unbalanced”.

“This has been most evident in the current strength of investor activity in the housing market, and in its concentration in Sydney and Melbourne,” it said.

“The apparent increase in the use of interest-only loans by both owner-occupiers and investors might also be consistent with increasingly speculative motives behind current housing demand.”

“Accordingly, household credit growth has picked up, almost entirely driven by investor housing credit, which is growing at its fastest pace since late 2007,” it said.

In his Tuesday speech, Mr Stevens pointed to property price rises in Sydney and Melbourne and double-digit credit growth in investor lending as reason to observe whether there “might be some overexcitement in the market”.

“Such an observer might want to satisfy themselves that lending standards are being maintained,” he said.

“And they might contemplate whether some suitably calibrated and focused action can help ensure sound standards, and that might lean into the price dynamic, [which] may be appropriate.

“That is the background to the much publicised comment that the bank was working with other agencies to see what more could be done on lending standards.”

Mr Stevens stressed that the RBA’s work with APRA is not a return to widespread attempts to restrict lending via direct controls.

“That era, that some of us remember all too well, was one in which the price of credit was simply too low and credit growth too high all round,” he said.

“We don't have that problem at present.”

The current level of interest rates, although very low, is well warranted on macroeconomic grounds, Mr Stevens said, adding that the economy has spare capacity.

“Inflation is well under control and is likely to remain so over the next couple of years,” he said.

“In such circumstances, monetary policy should be accommodative and, on present indications, is likely to be that way for some time yet.”