In the past two days we have seen a couple of important changes of direction from the RBA relating to housing and household debt.
First, in the minutes of the meeting held on Melbourne Cup day, they acknowledge that assessing conditions in the housing market had become more complicated. “While overall conditions had eased relative to 2015, some indicators had strengthened over the previous few months. In particular, housing price growth had picked up noticeably in Sydney and Melbourne. However, housing turnover and growth in housing credit both remained lower than a year earlier, consistent with the supervisory measures that had been taken to tighten lending standards and the more cautious attitude to lending in certain segments. In addition, a considerable supply of apartments is scheduled to come on stream over the next few years, particularly in the eastern capital cities, and growth in rents in the September quarter was the slowest for some decades”.
Last night the Governor his address said that some households are being more cautious, and not using their houses like ATMs as much as in the early 2000’s. He says “this more prudent behaviour is a positive development but given the high and rising levels of debt, though, we need to watch things carefully. It is important that we avoid a build-up of financial imbalances in household balance sheets. We can never know with certainty exactly what level of debt is sustainable. It depends on income growth, lending standards and asset prices. But it surely must be the case that the higher is the debt, the greater is the risk. Given this, as I said recently when explaining our monetary policy decisions, it is unlikely to be in the public interest, given current projections for the economy, to encourage a noticeable rise in household indebtedness, even if doing so might encourage slightly faster consumption growth in the short term”.
Household debt is high on any measure as we have frequently discussed and this was intentional RBA policy to offset the fading momentum from the mining sector. Household income is growing but slowly, so are under pressure from large mortgage commitments. But now with commodity prices a little higher, it is time to ratchet back growth in household debt. As we discussed before the next move in interest rates on mortgages is likely to be up.
But the key question is how to get businesses to investment in growth. As the RBA noted recently, many companies still have very high internal rates of return for investment hurdle assessments, and we noted growth in business lending is slow relative to home lending.
The risk weightings for business lending, under Basel III are significantly higher than for mortgage lending, so the banks can spread their capital further and leverage more by lending to households for home purchase.
So, the issue for the RBA and other policy makers is how to tilt the playing field to encourage business activity and lending. Lower cash rates will make no difference, but perhaps thought should be given to other incentives to encourage business investment.
