Lending to tighten if mortgage boom ramps up

His analysis of the Reserve Bank of Australia (RBA) credit data for housing debt has shown a rise of 0.4 per cent in December and 3.5 per cent year-on-year.

He said this is because existing borrowers have been focusing on paying down debt quickly, while the housing finance commitment data leads the flow of new credit with a lag.

However, Mr Oliver warned that the RBA would likely become more concerned given the pace of the rebound in lending commitments and house prices, but acknowledged that it is not concerned at this stage, noting that there is not much evidence of a deterioration in lending standards yet.

Dr Oliver’s observations relate to record-breaking figures released in the Australian Bureau of Statistics’ (ABS) lending indicators for December 2020, which had revealed that the total value of new housing loan commitments rose by 8.6 per cent (seasonally adjusted) in December 2020 to $26 billion, representing a 31.2 per cent increase on December 2019.

The value of new owner-occupier home loan commitments rose 8.7 per cent to $19.9 billion, which is 38.9 per cent higher than December 2019.

Meanwhile, ABS building approvals data for December 2020 had shown that approval numbers for private houses rose by 15.8 per cent, which is the largest number of approvals since the series began in 1983.

The record demand for housing has been attributed to federal and state housing stimulus measures such as the HomeBuilder scheme, as well as record-low interest rates, and according to Dr Oliver, economic recovery.

“It also seems consistent with further gains in house prices ahead, as these loans are drawn down and listings remain relatively low,” Dr Oliver said.

As such, Dr Oliver has called for housing stimulus measures to be curtailed in the future.

“At the very least, it would make sense for home borrower incentives to be wound back in the months ahead and not extended,” Dr Oliver posited.

Lending could tighten by year-end

Commenting on what could lie ahead, Dr Oliver said: “If housing credit growth accelerates significantly, I think we may see a renewed tightening in lending standards by year-end or early next year.”

“As was the case a few years ago, tighter lending standards, rather than rate hikes, are likely to be the RBA’s preferred path, at least initially, as it will likely remain premature for the RBA to start raising interest rates or ending bond buying entirely, considering continuing uncertainty and spare capacity in the wider economy at least out to the end of next year.”

Dr Oliver’s predictions have followed comments made by RBA governor Philip Lowe, who in his appearance at the House of Representatives’ standing committee on economics last week said that the RBA would continue to monitor lending standards instead of housing prices.

He added that while there are currently few signs of a deterioration in these standards, the Council of Financial Regulators – which has four members, including the Australian Prudential Regulation Authority, the Australian Securities and Investments Commission, the Reserve Bank of Australia (RBA) and the Treasury – would intervene if this were to change.

Last week, the RBA held the official cash rate at 0.10 per cent in its first monthly board meeting for 2021, and expanded its quantitative easing program by purchasing an additional $100 billion of bonds.

[Related: 2020 closed with new record mortgage activity]