Support gathers to cap home loans

Bubble fears Central banks conquered inflation in the 1980s and have managed the recovery from the GFC. Now some want more tools to control excess borrowing.

"Having experienced the old system under the Fraser government and having watched and listened as Paul Keating boasted of having the Reserve Bank in his pocket, I thought the change (of giving the Reserve independent authority to set interest rates) made a lot of sense." John Howard, Lazarus Rising.

While proud to have presided in 1996 over the concept of Reserve Bank independence, former prime minister John Howard was not entirely satisfied with what followed. Writing about the 2007 election, which he lost, Howard noted the Reserve Bank had used its independence to run tighter monetary policy than many other central banks.

With studied understatement he observed: "Those interest rate adjustments were not always politically palatable".

It will be interesting to hear his current views, as the emerging debate so-called macroprudential tools be developed and deployed across financial systems to provide an early warning of potential systemic crisis.

Our present domestic policy challenge is to cool down an overheated housing market. This has to be achieved without resorting to lifting interest rates.

Tighter rates policy would deliver an instant and unwanted appreciation of the Australian dollar – courtesy of the global carry trade – before it would have any impact on the housing market.

Macroprudential policy, its advocates point out, could address the problem by capping the loan-to-valuation ratio (LVR) for housing mortgages.

By specifically targeting such transactions in this fashion, the official short-term interest rate would not be affected. Fine-tuning could even define eligible housing transactions by geography or other discrete criteria. The cap could be adjusted over the cycle, much the way it is now done with monetary policy.

Sounds simple. Luci Ellis, head of the Financial Stability Department at the RBA, has pointed to the complexity involved even in this, quite basic, macroprudential exercise.

The first issue is that it would only be relevant for home mortgages. Business lending can be structured around such restrictions.

Secondly, the cap would have to be set very low to be binding on existing home buyers who are trading up. First home buyers would be squeezed out.

Thirdly, the cap would not prevent boom-bust cycles in housing prices. The evidence from overseas is caps limit the increase in arrears rates that occur when a bust comes.

Finally, focusing too much attention on the LVR would be a mistake. There are many other dimensions of lending standards beyond LVRs.

A borrower's ability to repay is more important than the collateral.

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Max Walsh


Max Walsh was for many years one of Australia’s top economic and political commentators, highly regarded as a journalist, author and broadcaster. Throughout his career, Max was involved in all dimensions of the media industry, which has encompassed positions with two of Australia’s largest publishing companies and television networks.

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