MNI POLICY:RBA Bullock: Risk Of Broader Credit Crunch Unlikely

By Sophia Rodrigues

     SYDNEY (MNI) - The Reserve Bank of Australia is alert to the possibility

that tightening in lending standards could affect the housing market and the

economy but thinks it is unlikely to lead to a widespread credit crunch,

Assistant Governor Michelle Bullock said Monday. 

     Bullock also said that the RBA continues to monitor closely the risk of

vulnerabilities from high household debt but doesn't think widespread financial

stress among households is imminent.

     Overall, her comments are consistent with RBA's guidance that the next move

in the cash rate is more likely to be up, than down.

     Bullock was speaking in Albury, New South Wales at a event organized by the

AI Group. The topic of the speech was, "The Evolution of Household Sector

Risks."

     Household debt in Australia relative to income, has risen further in recent

years to be at 190% currently from 160% in 2013, and from 70% in the early

1990s.

     "This raises potential vulnerabilities in both bank and household balance

sheets. While the risks are high, there are a number of factors that suggest

widespread financial stress among households is not imminent," Bullock said.

     In Australia, an important reason for the high level of mortgage debt is

that the rental housing stock is mostly owned by households. The RBA has

consistently said that the high level of debt raises two potential

vulnerabilities -- one is the financial stability risk for banks and the other

is the risk to the real economy if households struggle to meet repayments.

     Bullock said the arrears rate on housing loans remain very low and this,

coupled with the fact that Australian banks are well capitalized, means the risk

to the banking system is currently low.

     The other risk is that households could find themselves struggling to meet

repayments on the high debt level and might reduce consumption, or in the more

extreme case sell their houses or default on their loans.

     "This could have adverse effects on the real economy - for example, in the

form of lower economic growth, higher unemployment and falling house prices -

which could, in turn, amplify the negative shock," Bullock said.

     But based on the household debt data and on other economic numbers,

including the above-trend GDP growth and falling unemployment rate, it appears

widespread financial stress among households is not imminent, Bullock said.

     Bullock went on to talk about marginal borrower in Australia and the

effects on them from tightening in lending standards.

     She said the RBA remains alert to the possibility that constraint in

borrowing to some households could have flow-on effects to the housing market

and the economy.

     However, "our analysis suggests that while we should remain alert to this

possibility, it seems unlikely to result in a widespread credit crunch," Bullock

said.

     "The main reason is that most households do not borrow the maximum amount

anyway so will not be constrained by the tighter standards While the changes to

lending standards have tended to reduce maximum loan sizes, this has primarily

affected the riskiest borrowers who seek to borrow very close to the maximum

loan size and this is a very small group. Most borrowers will still be able to

take out the same sized loan," Bullock said.

     Bullock also expressed optimism that the transition to

principal-and-interest mortgage from interest-only mortgage terms would not have

a significant lasting effect on banks' housing loan arrears rates.

     According to Bullock, the RBA data suggest that most borrowers will either

be able to meet these higher repayments, refinance their loans with a new

lender, or extend their interest-only terms for long enough to enable to them to

resolve their situation. 

     That leaves only a relatively small share of borrowers that are finding it

hard to service a principal-and-interest loan, Bullock said.

--MNI Sydney Bureau; tel: +61 2-9716-5467; email: sophia.rodrigues@marketnews.com

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