RBA urges lenders to loosen up, but downplays risk of credit crunch

The Australian 2:35pm March 20, 2019

Paul Garvey, David Rogers

Reserve Bank assistant governor Michelle Bullock has urged the nation’s “stingy” banks to “loosen up” their lending practices amid the slowdown in Australian housing and credit markets.

The call came as she downplayed the risk of a credit crunch in Australia.

Speaking at an Urban Development Institute Australia function in Perth, Ms Bullock said the RBA was trying to encourage the banks to take on more risk and step up their lending to would-be property buyers.

“My hope, now that the royal commission has finished, and now that APRA has finished and is removing its benchmarks, that banks will start to lend again.”

She added: “I don’t have any silver bullet, unfortunately.

“All I can do, all the bank can do, is continue to encourage the banks ... please think very hard about whether your lending standards are too tight and whether you can loosen up a bit.”

Ms Bullock said banks in Australia had traditionally been pro-cyclical in their lending, with too much largesse when property prices were rising and tightening when prices were going down.

Ms Bullock said while the RBA did not have any tools to force the nation’s banks to lend, the RBA was engaging with banks and encouraging them to tell their frontline lending staff “not to be so stingy”.

“Zero credit losses is not the goal here,” she said.

“If banks are having zero credit losses, they’re not doing their job properly. They should be taking some risks.”

Housing prices in Sydney and Melbourne in particular have pulled back sharply in recent months, sparking growing concerns about a knock-on effect across the economy.

Ms Bullock said while the risks from a slowdown in housing and credit markets amid high household debt were “a little more heightened” than six months ago, there were no significant implications for financial stability at this stage.

She noted the RBA said six months ago in its financial stability review that global economic and financial conditions were generally positive and that the Australian economy was improving, but house prices were falling.

“At that time, we highlighted two domestic vulnerabilities that are relevant to my talk today – the level of household debt, and the slowdown in housing and credit markets.

“Six months on, these vulnerabilities remain. If anything, they are a little more heightened.”

Ms Bullock said while people who purchased properties in Sydney or Melbourne at the top of the market would be feeling the pinch, most people had bought their homes well before that peak.

“That suggests to me that the fall so far actually isn’t big enough to produce a very big change or stress in household balance sheets or bank balance sheets. The loans are still well secured,” she said.

The next year would be critical in determining whether the property slump would start to be felt more widely.

“If we see continued sharp falls, then you will start to see potentially more stress on households,” she said.

One risk Ms Bullock highlighted was the potential for a large influx of housing supply to exacerbate falls in housing prices and adversely affect households’ and developer’s financial positions, particularly in regard to high-density developments.

She noted that falling prices for apartments bought off the plan could see lenders revise their valuations below the buyer’s purchase price, so that they will be willing to lend less, and buyers will be forced to contribute more of their own funds or loans from other sources.

And developers delivering completed apartments into a cooling market face increasing settlement failures due to people who bought off the plan having difficulty getting finance or not proceeding.

“Currently, the risks here appear to be elevated but contained,” Ms Bullock said.

Moreover, the apartment market in Sydney is “quite soft” as more than 80,000 apartments have been built in the past few years, adding about 5 per cent to the housing supply in the nation’s biggest city. In Melbourne and Brisbane, prices have so far held up.”

China risks

Ms Bullock identified China’s financial stability as a key area of concern for the RBA.

Corporate debt in China, she said, is well over 200 per cent of GDP and was much higher than any other country at a similar stage of development.

In particular, the very high levels of corporate debt in China had the potential to trigger financial and economic crises in what is Australia’s single biggest trading partner.

“This rising debt has been driven by a non-regulated financial sector, by non-banks. The problem is the banks have helped finance those non-banks and there’s a concern that in doing all this lending they’ve taken risks. That will eventually flow back to the banks and the banks will find themselves in financial difficulties,” she said.

“I don’t know of an economy that has had a financial crisis that doesn’t ultimately have an economic crisis as well. That is the risk for Australia, the financial stability risk.”

She said the Chinese authorities were working to address the issue.

“They’re trying to wind back these risks by reining in the lending by the non-banks, but at the same time they’re trying to keep their growth up,” she said.

“This is a balancing act for the Chinese authorities at the moment and we hope that it comes out well, but at the moment that is one of our biggest external challenges.”