RBA governor tells banks to continue tightening their lending practices

After leaving the official cash rate on hold for another month, Reserve Bank governor Philip Lowe has warned banks to continue their crackdown on lending, saying too many loans are being given to borrowers who wouldn’t be able to service them if shocks hit the economy.

Mr Lowe sent a clear message to governments around the country that the best way to deal with the housing affordability crisis in the country was to increase supply and build more dwellings.

“Too many loans are still made where the borrower has the skinniest of income buffers after interest payments,” Mr Lowe said.

“In some cases, lenders are assuming people can live more frugally than in practice they can, leaving little buffer if things go wrong.”

The Australian Prudential Regulation Authority have ordered banks to cut the proportion of interest-only loans to 30 per cent, down from 40 per cent.

While Mr Lowe supported the crackdown, he also acknowledged the popular use of offset accounts by borrowers in Australia.

“This flexibility, which is of value to many people, isn’t available in most countries,” he said.

“A reduced reliance on interest-only loans in Australia would be a positive development and would help improve our resilience.”

“With interest rates so low, now is a good time for us to move in this direction.”

Mr Lowe said regulator crackdowns weren’t the long term solution that would fix the underlying supply and demand mismatch that had intensified due to unforeseen population growth and a lack of investment in transport links to open up new housing.

“In the end, addressing the supply side of the housing market is likely to prove a more durable way of dealing with the concerns that people have about debt and housing prices than detailed supervisory guidance.”


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