RBA against mortgage intervention

We’re sorry, this feature is currently unavailable. We’re working to restore it. Please try again later.

Advertisement

This was published 15 years ago

RBA against mortgage intervention

Australia's central bank says there is no case for permanent government intervention in the mortgage market to boost the availability of credit to borrowers.

"While the availability of finance has tightened up recently, over the longer term we do not expect that a shortage of housing finance will be one of the problems that Australia will have to confront,'' Reserve bank of Australia assistant governor Philip Lowe told a financial services forum in Sydney today. He did not speak about monetary policy.

The creation of permanent government structures to increase the supply of credit ``can have unintended consequences,'' Mr Lowe said.

Government-chartered Freddie Mac and Fannie May, which together own or guarantee 42% of the $US12 trillion US home loan market, have been battered by record delinquencies and rising losses as they struggle to shore up their balance sheets amid the worst housing slump since the Great Depression.

Australia, which doesn't have a government-backed mortgage lender, has a "very competitive private mortgage market which has offered a wider range of mortgage products to consumers than that seen in many other countries,'' Lowe said.

An Australian parliamentary committee studying housing affordability said in June that a state-backed lending agency, AussieMac, would be "beneficial in the Australian market''.

Housing affordability is at a record low in Australia because of interest rates at a 12-year high and a 140% surge in the median national house price since 1999.

Escaped the worst

Mr Lowe said Australia had "escaped the worst of the excesses seen in the US'' mortgage market and has loan arrears rates that are "considerably below comparable figures for many other countries.

Just over 0.4% of Australian banks' mortgages are more than 90 days in arrears, compared with 2.2% in the U.S. and 1.3% in the UK, Mr Lowe said.

One reason Australia has avoided mortgage-market problems is that "the big lift in aggregate house prices in Australia took place between 1996 and 2003, prior to that in a number of other countries,'' the assistant governor said.

"It meant that just at the time that financial innovation was accelerating around the world and investors were looking for new higher-yielding assets, Australian households were digesting the big run up in debt and house prices that had occurred earlier in the decade,'' Mr Lowe said.

Better shape

While many Australian households' finances "are undoubtedly currently strained, the aggregate position of the household sector is in better shape than it would have been had the housing boom run on longer and coincided with these developments in the global system.''

Mr Lowe said there are several proposals being debated around the world to avoid a repeat of the global credit crunch triggered by the US subprime crisis, including addressing how bonuses are paid to bankers, changing the way assets are valued and making central banks "lean against a financial boom, particularly if significant debt-financed imbalances are building up in the system''.

Another idea is that financial institutions should build up their capital buffers in the good times, Mr Lowe said.

Increasing reserves would likely reduce the need for banks to raise capital when times are tough, though it may also increase the cost of financial intermediation and "could distort the competitive position of different institutions in the financial system'', he said.

"The trade-offs are difficult and the implementation challenges are considerable.

"Despite this, finding ways of dealing with financial cycles is important if we are to maintain the broad community consensus that has supported financial liberalisation and globalisation over recent decades.''

Bloomberg

Most Viewed in Business

Loading