Future credit tightening to be ‘modest’: RBA

The RBA acknowledged that the slowdown in the flow of credit has been driven by tighter income and expense requirements, imposed off the back of the Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry, and predicted that any further tightening would be “modest”.

“Members noted that housing loan approvals had eased in recent months, driven by approvals to investors, although approvals for owner-occupiers had also declined.

“This was consistent with an easing in the demand for credit as well as lenders tightening their lending standards.

“Members noted that banks had recently started to collect more information from loan applicants on living expenses to assess a borrower’s capacity to service a loan based on actual living expenses, rather than relying on a proxy measure of minimum expenses based on survey benchmarks.

“While there may be some further tightening of lending standards affecting housing credit growth in the period ahead, any such tightening was expected to be modest.”

The RBA noted that it remains concerned over the high levels of household debt, but it believes regulatory tightening on credit has eased the associated risks.

“An easing in the demand for credit as well the Australian Prudential Regulation Authority’s supervisory measures and tighter credit standards had been helpful in containing the build-up of risk on household balance sheets, although the level of household debt remained high.”

Further, the RBA noted that it believes recent competition in the mortgage market has helped place downward pressure on interest rates.

“At the same time, lenders had been competing for high-quality borrowers, which had led to a decline of around 15 basis points in the average mortgage interest rate on outstanding loans since August 2017.”

The RBA claimed that “slightly higher funding costs for banks appeared to have had little effect on mortgage rates”.

Moreover, the RBA noted that despite the fall in home values across the country, property prices remain elevated.

“Conditions in the established housing market appeared to have eased further in Sydney and Melbourne. Housing prices had fallen a little in both cities, particularly for more expensive dwellings.

“Members observed that falls in housing prices in Melbourne had been concentrated in inner-city areas, whereas the declines in Sydney had been more widespread.

“Members noted that, nonetheless, housing prices were still 40 per cent higher in Sydney and Melbourne than at the beginning of 2014, while housing prices in Perth had fallen by around 10 per cent over the same period.

“Auction clearance rates in Sydney and Melbourne had fallen to their lowest levels in a number of years.”

[Related: Cash rate stagnation continues]