In its semi-annual Financial Stability Review, the Reserve Bank of Australia (RBA) has reported that tighter lending standards imposed off the back of scrutiny from both regulators and the banking royal commission have helped alleviate the threat that weakening housing market conditions pose to the broader economy.
Recent figures released by the Australian Bureau of Statistics (ABS) reported that while dwelling approvals increased by 19.1 per cent in February, they remain 12.5 per cent lower year-on-year.
The latest Hedonic Home Value Index from CoreLogic also reported that dwelling values continued to fall nationwide, declining by a further 0.6 per cent in March.
“Improvements in the quality of banks’ mortgage lending have mitigated the risks that weaker housing market conditions might otherwise pose to household and bank balance sheets,” the RBA noted.
“This is especially true for new borrowers, who have had less time to accumulate equity through earlier housing price rises and principal repayments.
“Changes in lending practices over the past few years mean that new borrowers will, on average, have less risky loans and be in a better financial position than previous cohorts.”
The RBA noted that as a result of such measures, loans with an LVR over 90 per cent remain less than 7 per cent of housing loan approvals, while new interest-only lending has fallen to around 16 per cent of total loan approvals and 7 per cent of owner-occupier loan approvals.
However, some analysts have claimed that tighter underwriting standards have been the primary cause of weakness in housing market conditions, despite the RBA’s assertion that the downturn has been “demand-driven”.
Economists at ANZ Research have observed: “In trying to explain the reason for the fall in house prices, there is an ongoing debate about the extent to which reduced demand for housing or tighter credit supply are responsible.
“We agree with the RBA that both are at work. But we think it’s clear that the initial trigger for house price weakness was tightening credit supply.”
The economists added that lending policy changes implemented by banks re-routed the trajectory of housing market activity.
“After the initial impact of the APRA policy shift in 2017, the housing market was in the process of stabilising by late 2017/early 2018,” the economists observed.
“This is evident in both the auction clearance rate and house prices themselves.
“We then see a sharp turn lower in both following the start of the [financial services royal commission], with its initial focus on mortgage lending.”