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‘Relaxing’ lending standards would ‘reflate’ credit bubble

Regulators should consider “aggressive” monetary policy action “sooner rather than later”, with a move to wind back prudential measures likely to restimulate the “credit boom”, according to one economist.

Speaking to Mortgage Business, managing director of Market Economics Stephen Koukoulas has warned that despite falling property prices and weakening demand for credit, a move by regulators to ease prudential measures would “reflate” the credit boom.

The extent of the slowdown in housing market conditions has been highlighted by the latest data from the Australian Bureau of Statistics, which has reported a 2.5 per cent fall in the value of home loan approvals in November 2018, in seasonally adjusted terms, with housing approvals also falling, plunging 32.8 per cent in the year to 30 November 2018.

Figures provided by property research firm CoreLogic have also revealed that national dwelling values have slumped by 4.8 per cent nationwide, driven by a 6.1 per cent drop across Australia’s capital cities, led by an 8.9 per cent fall in Sydney and a 7 per cent decline in Melbourne


Mr Koukoulas said that weakening housing market conditions are “concerning” given the effect they have on consumer spending and confidence in the overall economy.

“I do think there’s a wealth effect from the decline in house prices on consumer spending; it’s been proven over many decades of research around the world,” Mr Koukoulas said.

However, the economist backed “continued oversight” of the lending landscape, for both owner-occupied and investor housing credit.

Mr Koukoulas said he was more concerned with subdued activity in other economic indicators and called for “aggressive” cuts to the official cash rate from the Reserve Bank of Australia (RBA).

“I’m not really keen on relaxing the policy too much, because you’d then reflate the credit boom,” Mr Koukoulas said. “I’d actually be looking more at monetary policy.”

He continued: “I think you should cut interest rates and cut them quite aggressively – not necessarily for credit and housing reasons, but more to push the dollar lower, give the export sector a bit of a boost, and for private sector business investment.”

When asked when he thinks the RBA should cut the official cash rate, Mr Koukoulas said “sooner rather than later”.

“Next week we’ll get the inflation figures, and from my estimates, it looks like inflation will again be below the bottom of the target range,” he added.

“If they cut rates now, they’re not going to see inflation blow out quickly.”

However, the economist said that a rate cut would be “somewhat of a surprise” given the RBA’s positive economic outlook.  

“It’s important for the RBA to be pragmatic, use policy to grow the economy, and lock in economic growth,” Mr Koukoulas said.

Moreover, despite arguing against the loosening of prudential standards, Mr Koukoulas urged regulators and policymakers not to further exacerbate the downturn with new regulation off the back of the financial services royal commission’s final report.  

“We’re not sure what exactly is going to be in the report, although we’ve got a rough idea that it’ll be pretty aggressive in terms of changes that need to be made or just the enforcement of existing rules,” he said.

“Obviously, there’s an important need for the banks to lift their game, be more careful in terms of who they lend to, the fees they charge, who they charge – that whole myriad of issues.”

Mr Koukoulas concluded: “That said, it just needs to be reinforcing the implementation of those policies, making sure they’re well targeted and just be careful not to over-regulate at a time when the economy is very weak.”

[Related: ‘RBA spin wearing thin’ as mortgage stress mounts]

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