MNI INSIGHT: Amid Optimism, RBA Wary Of Credit, Housing Risks

By Lachlan Colquhoun

     LONDON (MNI) - The Reserve Bank of Australia is closely monitoring risks,

including the danger of a more intense property sell-off and declining demand

from China, which could, if they play out, lead it to review its current

guidance for the next interest rate move to be up, MNI understands. 

     The RBA's October Monetary Policy statement held out a likely 2019 rise in

official interest rates from the historic low of 1.5%, a level which has held

since August 2016. This was posited on expectations that wages growth would

continue in 2019, unemployment fall below the current 5% and inflation rise from

an annual 1.9% into the Bank's target range of between 2% and 3%.

     But the Bank is watching a cluster of potential hazards, among them the

possibility of a domestic credit squeeze as the regulated banking sector --

under intense scrutiny by a Royal Commission -- loses its appetite for lending,

particularly for housing.

     The RBA's view is that the Australian housing market is not likely to crash

of its own accord, despite a current 5% fall in residential home prices

nationally from their late 2017 peak. 

     The Bank points out that this has come after a 60% national increase over

the last five years, so that only very recent buyers will have seen the prices

of their properties fall below the purchase price.  Household gearing has also

improved and only around 1% of all households have debt levels which exceed

their assets, while mortgage arrears have been cut back sharply, the RBA's

October Financial Stability Review noted.

     --TIGHTER LENDING STANDARDS

     Tightened mortgage lending rules have also reduced the riskiness of new

housing lending,  although the Bank is aware that there is a point beyond which

this becomes counterproductive.  The Australian Prudential Regulatory Authority

has cracked down on interest only and investor loans, which fuelled the property

boom, prompting many investors to leave the market.

     Any further contraction in credit is likely to come not from regulators but

from the major retail banks themselves, which are currently under the microscope

from the Royal Commission into Misconduct, which is set to report in March.

     The RBA is watching how this will play out, with a downside risk that an

excessive tightening in lending could be detrimental to the economy,

particularly if it also extended to business lending and impacted on employment

growth. 

     Although this scenario would take time to materialise, MNI understands that

it could prompt a review of the RBA's monetary policy and change its current

views on its next move.

     --TRADE WAR FEARS

     The RBA considers that a raft of factors, both global and domestic, would

be necessary to create the preconditions for a housing slide.

     Foremost among these is the potential fallout from any trade war between

the U.S. and China, which is Australia's largest trading partner and has been

instrumental to extending the country's 27-year-long stretch without a

recession.

     Chinese growth, while still over 6%, is now the weakest in 10 years. The

RBA is aware that a slower China will impact on Australia, potentially reversing

employment gains and wages growth and putting more pressure on housing markets.

     As the RBA has noted, much of the wealth of Australian households is in

illiquid assets, most notably in their pension funds and in residential

property. 

     If a worsening economy pushes people to exit the property market with any

significant momentum, then the RBA's monetary policy stance could come under

close review.

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