Speaking at an Economics Society of Australia lunch in Brisbane yesterday, Mr Lowe discussed the relationship between household debt, income growth and house prices.
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“In terms of resilience, my overall assessment is that the recent increase in household debt relative to our incomes has made the economy less resilient to future shocks,” he said.
“Given this assessment, the Reserve Bank has strongly supported the prudential measures undertaken by APRA. Double-digit growth in debt owed by investors at a time of weak income growth cannot be strengthening the resilience of our economy. Nor can a high concentration of interest-only loans.”
Slower growth in household incomes has become a major concern for the Reserve Bank, particularly as house prices continue to rise. Mr Lowe noted that incomes have grown at an average pace of 3 per cent over the past four years, less than half of the 7 per cent growth rate during the 2000s.
However, the RBA boss said there are other factors at play, such as population growth and Sydney and Melbourne becoming “major global cities” in recent years.
“Reflecting this, in some markets there has been strong demand by overseas investors,” Mr Lowe said.
He noted that record-low interest rates and rising property prices have driven more and more Australians to go into debt to finance property investments.
“The result has been strong growth in borrowing by investors, with investors accounting for 30 to 40 per cent of new loans.”
While he stressed that property investors are not the primary driver of higher house prices, Mr Lowe says borrowing by investors has certainly added to the upward pressure on prices caused by the underlying supply-demand dynamics.
“It has acted as a financial amplifier in some cities, adding to the already upward pressure on prices,” he said.
“The borrowing by investors is also obviously contributing to the rise in the aggregate debt-to-income ratio. Just like in the early 2000s, there is again a discussion as to whether these increases will continue and whether they are sustainable.”
While the RBA has thrown its support behind APRA's efforts to curb investor lending, Mr Lowe echoed comments made by APRA boss Wayne Byres last week that macroprudential measures are not intended to cool the property market.
"I want to point out that APRA's measures are not targeted at high housing prices," he said. "The international evidence is that these types of measures cannot sustainably address pressures on housing prices originating from the underlying supply-demand balance."
What they can provide, he explained, is some "breathing space" while the underlying issues are addressed.
"In doing so, they can help lessen the financial amplification of the cycle that I spoke about before. Reducing this amplification while a better balance is established between supply and demand in the housing market can help with the resilience of our economy."