Former Reserve Bank board member Warwick McKibbin has blamed the bank’s ultra-low interest rate policy for unleashing a surge in unsustainable property speculation, at the same time as the housing investment loans’ share in total borrowing rises to its highest level in at least 24 years.
Growth in loans to investors to buy dwellings accelerated to a six-year high in August, new data showed yesterday, prompting renewed speculation the RBA would follow through with a warning it was talking to other regulators about a co-ordinated crackdown on the debt-fuelled property speculation via new “macroprudential” rules.
Craig Meller, chief executive of AMP, yesterday said “finding ways to moderate the investment in property, while still keeping interest rates low to generate momentum elsewhere in the economy, looks like good policy.”
But Professor McKibbin said the bank had made the wrong call to cut interest rates so low and was facing the consequences.
“A surge in investor borrowing for assets in relatively fixed supply such as housing was inevitable; yet cutting rates was never going to do much to boost business loans or weaken the currency in the current environment,” Professor McKibbin told The Australian. “There shouldn’t be a need for a specific macroprudential policy; existing prudential rules should already be working to limit excesses building up in the system — clearly if they are not then they should already have been changed.”
The value of outstanding loans to investors rose 9.2 per cent over the year to August — more than three times as fast as inflation — to $471 billion, while loans to businesses, which the RBA’s low rates are meant to be encouraging, rose only 3.2 per cent to $758bn.
Professor McKibbin said businesses were not borrowing to invest because of prevailing uncertainty about the tax environment, the economic cycle and the impact of ultra-low rates globally.
“The best response now for the RBA would be a series of well-flagged interest rate rises,” he said.
“When rates do rise there will be a lot of adjustment in asset prices and we know that will be a problem.”
Strong growth in lending has pushed housing investors’ share of total outstanding loans in the economy — $2.29 trillion in August — to almost 21 per cent, the highest level since 1990 and probably ever. Such loans were 18.5 per cent of the total a decade ago and 3.3 per cent in 1990, according to official RBA data.
Owner-occupier home lending, which includes first-home buyers, grew only 5.4 per cent over the year to $919bn.
Mr Meller said: “The challenge we’ve got as a country, we need low interest rates to stimulate growth, and one of the side impacts of low interest rates is more and more money being invested into property rather than being used to stimulate broader growth in the economy.”
Speaking at a financial services breakfast, Mr Meller said Australia’s rapid population growth justified greater efforts to free up housing supply.
“It always surprises me that whenever there’s debate about the property market everyone jumps to demand side controls and issues or stimulation, rather than looking at the fundamental issue of the residential property market in Australia is that we’re not addressing the supply side,” he said.
The RBA fears the growing share of investors in the home lending market is driving rapid increases in house prices in Sydney and Melbourne that could leave the economy exposed should they fall quickly.
Last week it foreshadowed talks with APRA about the benefits of introducing hard limits on loans to investors.
New Zealand and Britain have introduced “macroprudential” rules with limited success.
This article first appeared in The Australian.