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RBA switched rate priority on house prices versus jobs

The RBA’s October 2021 ‘Financial Stability Review’ (FSR) comes in the wake of APRA’s announcement earlier in the week to increase the minimum interest rate buffer it expects banks to use when assessing the serviceability of home loan applications. In that context, the October FSR was expected to have a stronger than usual emphasis on housing-related risks. And the RBA didn’t disappoint.

Prudential controls starting

Recall on Wednesday that APRA announced that authorised deposit taking institutions (ADIs) will need to assess new borrowers’ ability to meet their loan repayments at an interest rate that is at least 3% above the loan product rate. This is an increase of 0.5% on the previous 2.5% minimum interest rate buffer (note that some lenders had already applied a rate above 2.5%).

As we wrote at the time, the move by APRA will strengthen serviceability standards. But we do not think the increase of 50bps on the minimum interest rate buffer was enough to materially shift the outlook for the housing market in 2022 (see here).

The FSR adds a lot more colour to the household debt and housing-related issues that are currently weighing on the RBA’s mind. To be clear, the RBA has expressed concerns around the overall level of household indebtedness for some time, but without doubt those concerns have been notched up more recently given the acceleration in borrowing.

The FSR notes:

“there has been a build-up of systemic risks associated with high and rising household indebtedness. Vulnerabilities could build further if housing market strength gives way to exuberance, with expectations of further price rises leading borrowers to take on greater risk and banks potentially easing lending standards”.

The move by APRA earlier in the week sought to address those risks. But if credit growth remains stronger than income over coming months, pressure is likely to intensify for APRA to make some more policy changes.

On that front, an entire section of the FSR was devoted to “Mortgage Macroprudential Policies”.

RBA wants macroprudential to take house price burden ...

It is crystal clear that the RBA will seek to have any concerns around an overheated housing market addressed through more macroprudential policies from APRA. Rapidly-rising home prices or an acceleration in household debt because of record low rates will not directly feed into the RBA’s decision making around when they commence normalising rates.

Put another way, the RBA’s focus for monetary policy is squarely on the inflation target and achieving full employment. The RBA considers the financial stability component of the charter to be best addressed via macroprudential policies.

... but it didn't in the past

This hasn’t always been the case.

In September 2014, the RBA Governor at the time, Glenn Stevens, stated on the case for more monetary policy easing to stimulate the economy,

“while we may desire to see a faster reduction in the rate of unemployment, further inflating an already elevated level of housing prices seems an unwise route to try to achieve that”.

Governor Philip Lowe took a similar mindset to his first few years in the top spot. But now the RBA is fixed on getting inflation and wages up given many years of undershooting their inflation target on an underlying basis.

Overall, the FSR today paints the picture of a central bank that will be playing very close attention to the housing market and the dynamics around new lending, debt repayment and leverage.

A selection of charts and commentary

There are concerns around the acceleration in new lending and credit growth given already high debt to income ratios in Australia.

The RBA finds that lending standards remain sound but that the share of lending at high debt to income ratios has risen quickly.

Borrowers with high debt to income rations more often experience mortgage stress, although in the case of investors, liquidity buffers are often higher.

Household savings have lifted through the pandemic. Some of these savings have been put towards additional mortgage repayments.


Gareth Aird is Head of Australian Economics and Kristina Clifton is a Senior Economist with the Global Economic & Markets Research (GEMR) team at Commonwealth Bank of Australia. This report is not investment research and nor does it purport to make any recommendations. Rather, this report is for informational purposes only and is not to be relied upon for any investment purpose.


October 19, 2021

Has anyone seen that Dominic and Josh bringing up the “Big Australia/NSW” idea again? So predictable. Anyway, also note the quality immigrants they are hoping to attract. All those people will work from home and want their children go to good schools. Think what that would do to house price, especially in desirable area.

October 18, 2021

Thank you to those readers who read and commented about gold as money. I agree that property is wealth, but not money. Money is used to buy property. (See the Parable of the Talents in the Bible). Money is the holder of savings wealth to bridge the time between providing valuble goods and services and investing it in property and business ownership. The ability to own valuable money rather than being given an IOU in paper or plastic as "legal tender" is like a ponzi scheme, where the last one to hold it loses everything. I can never understand how, especially in the "land of the free and home of the brave" that Americans aquiesced to this freedom being taken away from them by Roosevelt in the New Deal. Possessing gold was punishable by big fines and jail time. Property and land however bring their own problems. Property comes in huge lumps and it requires active management, especially agricultural land. Owning rental property requires the landlord to do something about a blocked toilet, but you never have to fix those in the Commonwealth bank as a shareholder. I do not expect gold money anytime soon, as no one in politics would want it, because it takes away their power to control people. Crypto (my typo previously) reminds me of the Hans Christian Anderson fairy tale "The emperor's new clothes."

October 17, 2021

Houses are the new gold, even better with rent.

Excess liquidity has to go somewhere. With 1% interest rate for cash savings, people are forced to take risks. For most people, real estate is much easier than equities to understand and perceived to be safer. Adding the favourable tax policies, low interest rate and easy credit, it’s impossible for real estate to avoid boom. Are RBA, APRA and all other acronyms too dumb to have a strategy or simply don’t care? Both.

October 16, 2021

My scorn and derision for the powers of central banks worldwide knows no bounds. Return to full value money in gold is the only answer to trust in government issued money, as existed for two and a half millenia before the first world war. While cryto is not the answer in my opinion, its popularity indicates the desire to get away from government issued money of no intrinsic value. Designated inbuilt inflation rates for the Reserve bank to achieve, and penalties for savers, and the ability to decree non-market interest rates is doomed to cause more problems than it fixes. Money in gold sovereigns, with interest also payable in gold, would soon limit that power to mess things up. Before anyone objects to this comment, let me remind you that modern mining technology has produced sufficient new gold since 1900 to keep up with the world's population. 85% of all mined gold has been produced since this date, notwithstanding the gold rushes of the 19th century.

October 17, 2021

David I agree but don't think they will ever want their power limited by the imposition of the discipline of gold itself or a gold standard. My biggest concern is that SDRs created out of thin air and backed by nothing will become the new international currency. The USD can't continue as reserve currency forever without further destroying its own economy by running increasing trade deficits. SDRs would be one step closer to the horror of a totally planned and centralised world economy. I also don't want the removal of cash from the system. CBDCs are a method of forcing you to spend by potentially imposing negative rates or outright confiscation of savings. US authorities have just released a paper about regulating crypto. Crypto users continually talk up its benefits. I get why they want it but they are not limited in supply. They are Ponzi schemes. I don't see bullion buyers continually pestering others to buy bullion like crypto 'investors' do.

October 16, 2021

The 3%buffer on housing loans demanded by APRA is difficult to understand. The borrower has to demonstrate this to obtain a loan. If the whole idea of this is to stop people buying houses by making it more difficult to obtain a loan, why not put a ceiling on the amount of money that can be loaned for houses by each ADI. Seeing that the borrower and seller have no idea which bank has money available to lend at any one time, prices will drift down if the seller really does want to sell. Speculators will not like it.

October 17, 2021

No one ever takes into account cash overseas buyers. I want property ownership by citizens as high as possible. I don't see prices drifting down. The world has been flooded with liquidity and many people will want to convert it to something tangible like real estate. Pointless leaving it in the bank.

October 16, 2021

We need to talk. If increasing well-being and reducing mental health is a goal, then the process of selling and buying properties needs to be reviewed immediately.

Imagine a world where you will need to put a bid on the school uniform for your child, or supermarket ingredients. You would win the shirt and the jumper but not the pants and the socks. You will spend hours in the supermarket and come back with only half of the ingredients you need. In March 2020, some people tried to make an online auction on toilet paper and Alcogel. These people were condemned and for a good reason.

At the moment, auctions are a legitimate way to handle buying and selling of properties in Australia. To me, auctions look like a way of irrational gambling that adds a layer of anxiety into society. When talking about anxiety, I refer to all sides - sellers and buyers. Both spend sleepless nights trying to calculate if they can buy or sell in time, developing hopes, and much too often get disappointed and almost always worry.

Often, buyers who end up buying are happy but realize that they ended up paying hundreds of thousands more than the guide price at the spur of the moment.

If you read this, then most chances you went through this process. Do you think that the next generation should go through the same thing?

A property should have a selling price. It can be high, but it needs to be stated clearly. And if we try to change things for the better, then nobody should hide from the selling advertisement information such as internal size (no, it’s not total size) or the price.

Changing the selling law to support a known and non-fake selling price (Agents, we all know you mean much more than the price guide) will lead to more sanity and a happier society.

Banks have an evaluation figure for all properties. The banks base their evaluation on the last selling prices of similar properties in a suburb, size, etc. The evaluation figure should be a base for deciding on a price. If the seller wants to make it higher than bank evaluation, they can. If the buyer wants to negotiate it down, they can always try. However, a price figure should be stated clearly.

If we want to make the process easier and accessible, then properties evaluation price should have a similar site as cars for sale - for example,

In conversations I am having on the matter, Australians seem to hate the Auction system, but accept it as a fact. For people who came from overseas, the auction process is hard to get used to. The stress that comes with auctions is not proportional to the event. Buying a property should be a happy moment and not a nerve-wracking one. Long past the days when Australians auctioned for commodities as wool, and it's about time they will stop auctioning for a property.

October 16, 2021

This is so true. Australians should develop a system where thinking about citizens.
Why auction is needed? This simply delivers wealth to someone already is wealthy.
Why allowing investors to buy like 10 properties? Do they actually need to live in those 10 hourses?
These systems need addressed. Median housing price reach 1 million dollar. Is typical Australians that rich now that they are able to afford them?
System is currupted because right now because only rich gets richer.

Syd Buckle
October 15, 2021

We had 3 houses in our street in Duncraig Perth that were rentals...all put on the market and sold in this overvalued market....obviously the property investors will be cashed up ready when the interest rate goes up and the you know what "hits the fan" they will buy up in the lower market...America will put up the interest rates and we will follow like sheep. Or the Aussie $ will be worthless.

October 17, 2021

I am tired of hearing about how investors own 10 properties. ATO stats show most investors own one (70%); these people are providing rental accommodation. Less than one percent own 5 or more.

October 17, 2021

We are not following like sheep. If the USA and others lower rates, we have to as well or the AUD will be too strong for exports. Fiat currency is deteriorating in value so individuals are attempting to preserve value with real assets. This is rational behaviour.

October 15, 2021

RBA is asking the banks to do the dirty work for them with the buffer of 3%. There is no IMF(international monetary fund) pressure on RBA, we cross the bridge when we get there.

October 15, 2021

Surely it makes sense to increase loan rates just 1 or 2%, this would stop crazy house investment speculation & people with good savings will be able to get a sensible return on their money.

October 16, 2021

They still wouldn't get a good return even if rates increased 1 or 2%, it's unfortunate but term deposit funded retirees are really going to suffer. These days you need to make 7-8% or you're going backwards in real terms. Inflation has started and it's only going to keep coming - especially with rent increases now that alot of investors are selling out of property or prevented from buying more property due to changes.

October 13, 2021

I suspect that we might find out in twelve months that the RBA has been fighting the last war in its effort to raise wages and inflation and that its indication/promise that the cash rate will not rise until 2024 was unwise. It has set the scene for it to be boxed in on these issues, which will limit its ability to change policy.

October 13, 2021

Phillip Lowe answers questions like a politician. Blame someone else and say it is someone else's responsibility. Higher house prices are good for sitting governments as home owners feel wealthier rather than thinking "I have a roof over my head and I still have a roof over my head". Live in the city and move to the bush is the only way you become wealthier when house prices rise. Lowe didn't appear to be concerned about employment before Covid so why now? Cheap money for his boss and to support a very wasteful and inefficient government.

October 13, 2021

As demonstrated by the border closures due to Covid, full employment is best addresses by cutting migration. Cutting interest rates mostly creates speculative investing, businesses invest/expand based on demand for their goods and services not on interest rates. The RBA's own economists (Saunders and Tulip in 2019) clearly demonstrated the link between lower rates and higher house prices.

Owen Boxall
October 13, 2021

If you haven’t got a job in WA you must be very elusive report of farmers offer 175k for workers in Esperance


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