High risk in ‘excessive borrowing’

RBA warning over low rates

THE Reserve Bank has warned of a “risk of excessive borrowing” as it keeps the cash rate at a record low to meet its employment and inflation goals, potentially foreshadowing further lending curbs.

“There is a risk of excessive borrowing due to low interest rates and rising house prices,” the central bank said in its Financial Stability Review released on Friday.

“Low interest rates have contributed to high prices for financial assets and housing.

“There has been some increased risk-taking and higher borrowing.”

The warning comes after the Australian Prudential Regulation Authority this week increased banks’ minimum home loan interest rate buffer to 3 per cent above their lending rate from 2.5 per cent previously.

The RBA noted that there had been large increases in housing prices and an acceleration in borrowing in Australia and some other countries.

“Vulnerabilities can increase if housing market strength turns to exuberance with borrowers taking on greater risk given expectations of further price rises and banks potentially easing lending standards,” the RBA said.

“In response to these risks, the Australian Prudential Regulation Authority has increased the interest rate buffer used to assess loans, which will reduce the borrowing capacity for new borrowers.”

The RBA noted that if loan commitments were to be maintained around their recent levels, credit growth could be around 10 per cent in six-month-ended annualised terms by early next year.

“This would exceed income growth, pushing aggregate household credit-toincome ratios higher,” the RBA said.

“A sustained pick-up in housing credit growth well in excess of growth in household incomes would add to risks related to the already high level of household indebtedness.”

While lending standards “remain sound overall”, and the “quality of outstanding credit is high”, there had been “increases in particular forms of mortgage lending that are typically considered to be more risky”, particularly high debt-to-income ratios and high loan-to-valuation ratio lending.

“Most notably, the share of new loans originated with a DTI (debt-to-income ratio) greater than or equal to six, increased by around 6 percentage points to 22 per cent over the year to the June quarter 2021,” the RBA said.

This could rise because the share of high-DTI lending was below internal risk limits at most banks. The RBA said some of the increase in highDTI lending reflected higher demand for bridging loans, due to increased housing turnover and rising house prices, which encourage repeat purchasers to buy new properties before selling their existing properties.