APRA warns of housing risks as RBA mulls rate cut

The Reserve bank has considered a further cut in record-low interest rates to stimulate a sluggish economy, a move that seemingly puts it at odds with banking regulator APRA, which has voiced concerns that easy money is elevating risk in the housing market. 

At a business lunch in Melbourne yesterday, RBA governor Glenn Stevens noted that domestic inflation was low and asset values had been rising.

“Interest rates are very low, and the central bank has talked about lowering them further,” Mr Stevens said.

But Australian Prudential Regulation Authority chairman Wayne Byres, whose remit is the safety and resilience of the financial system, told a parliamentary committee that it was difficult to tell whether a market was undergoing bubble-like conditions before it was too late.

“Bubbles are actually very hard to define. It’s always hard to spot,” Mr Byres said.

“But if you look at the conditions we are in at present, where we have very low interest rates, very high household debt, subdued income growth, rising unemployment, very high house prices and a very competitive fin­ancial market in terms of housing lending, there is a lot of potential for risk, and risk is higher than it might otherwise be.”

The RBA, for its part, has been doing all it can to smooth the transition from a rapidly deflating resources boom by stoking demand in the wider economy through lower interest rates.

In February, it cut the cash rate by 25 basis points to 2.25 per cent.

However, as the US Federal Reserve board this week moved closer to its first rate rise in nine years, Mr Stevens highlighted the different trajectories of the two economies by hinting that the RBA had already considered a further monetary easing.

This helped spur the Australian sharemarket to hit a seven-year high. The S&P/ASX 200 index gained 24.7 points, or 0.4 per cent, to 5975.5 yesterday — the highest close for the benchmark since early 2008 and puts the index within striking distance of the key 6000-point level.

Mr Stevens says there would be turbulence in markets once the Fed finally does lift rates, most likely at a “gradual” pace sometime this year.

“Fed policy is still likely to be quite expansionary for some time,” he said. “The punch bowl isn’t being taken away; its contents are just being made a little less potent.”

Amid the heated debate in Canberra about the Abbott government’s control — or lack of it — over the federal budget, Mr Stevens stressed that the nation did not currently have a budgetary crisis. Indeed, conditions were “remarkably benign”, with the commonwealth and other countries able to borrow as cheaply now as at any time in history.

“My point is that we are not on the correct path for the long run,” he said.

“We need to get on a better path in benign times so that when not so benign times come, we are more resilient.

“We can then sustain a position of strength for longer.”

While losing the nation’s AAA credit rating would not have a huge impact on borrowing costs, it was difficult to contain the fallout to a single-notch downgrade, in this case to AA+.

Also, “if God forbid there is a large shock”, Mr Stevens said the nation might not have the macroeconomic capacity to respond ­effectively. For example, a budget deficit of 5-6 per cent of GDP, up from 3 per cent, would leave more limited scope for some discretionary stimulus.

“The capital markets would ask a few more awkward questions of us,” Mr Stevens said.

Mr Byres told the committee that the best way to protect the ­financial system and the broader economy from any issues in the housing market was to ensure that the banks were lending on a sensible, prudent basis, and deal with any volatility that might occur. “We’re lucky as we haven’t had a housing problem and had low default and loss rates,” he said.

“But that doesn’t mean that will always be the case.”

As to the timing of any intervention by APRA, Mr Byers said the regulator was assessing the plans and practices of individual lenders and, over the next month or so, would consider if any supervisory action was needed.

Discussions with the major lenders showed there was a recognition that it was in everyone’s best interests for sound lending standards to be maintained.

“But we shall see — we’re ready to take further action if needed,” Mr Byres said.

Higher capital requirements were the most likely regulatory response, on a bank-by-bank basis.

However, many lenders were using “quite reasonable” serviceability benchmarks.

The above is an abstract from http://www.theaustralian.com.au/business/economics/apra-warns-of-housing-risks-as-rba-mulls-rate-cut/story-e6frg926-1227272007199

Caroline He

Four C Realty