In what was an otherwise fairly bland June monetary policy statement from the Reserve Bank of Australia (RBA), the one major talking point was the bank’s commentary on Australia’s housing market.
Funnily enough, it wasn’t actually about prices, a major area of discussion in Australia at present, but rather what it said in relation to mortgage rates.
Here’s the line in question:
While there may be some further tightening of lending standards, the average mortgage interest rate on outstanding loans is continuing to decline.
Based on my Twitter timeline, no one is really sure on what to make of it, other than the likelihood that lending standards could be tightened further by APRA, especially with recent revelations at Australia’s Banking Royal Commission.
And, as seen in this tweet below from Stephen Koukoulas, Managing Director at Market Economics, it’s not even clear whether average mortgage interest rate on outstanding loans are really declining at present.
It’s all a bit uncertain as to what the RBA is saying.
Rather than speculating about what we think it means, we’ll let the experts have a go.
Here’s what economists have been saying about the inclusion of the line in the June statement.
Bill Evans, Westpac
The statement notes a slowdown in investor housing credit over the past year, retains a line that “APRA’s supervisory measures and tighter credit standards have been helpful in containing the build-up of risk in household balance sheets” and adds that “while there may be some further tightening of lending standards, the average mortgage interest rate on outstanding loans is continuing to decline.”
Together this is a strong indication that, to the extent that we are seeing an additional tightening in lending standards weigh on housing markets, the Bank views this as part of an important ‘de-risking’ exercise that is likely to have few material spillover effects to the wider economy.
That looks to be an optimistic assessment in our view.
Firstly, rates and conditions on the ‘marginal’ loan are more important for market conditions. Secondly, the slight decline in the average mortgage rate ignores a likely rise in average repayments as borrowers shift from ‘interest only’ to ‘principal and interest’ loans. And thirdly, the discussion completely ignores potential negative spillovers via confidence and wealth effects.
Paul Dales, Capital Economics
By stating “while there may be some further tightening of lending standards, the average mortgage interest rate on outstanding loans is continuing to decline” the RBA implied that the impact on the economy of any fall, or smaller rise, in the quantity of credit will be offset by a boost from a fall in the price of credit as existing mortgage holders refinance to lower rates. So the RBA doesn’t think the Royal Commission will influence the economy much.
There’s no way of knowing for sure what’s going to happen to credit conditions. But we are more worried about the risk that tighter conditions cause credit growth to slow which, by weakening the housing market, consumption and investment, could crimp GDP growth and keep inflation low.
Shane Oliver, AMP Capital
The RBA does not appear to be too fussed by the further fall in Sydney and Melbourne property prices or the further tightening in lending standards now underway.
It’s doubtful, though, that the further tightening in lending standards will be offset by a continuing decline in “the average mortgage interest rate on outstanding loans” as the RBA seems to be implying, as the latter is simply occurring as new borrowers have lower rates than borrowers from say five years ago whereas the tightening in lending standards around income and expenses will act to slow the number of new borrowers who can get into the housing market.
David Plank, ANZ
We think the Bank has tried to soften the implications of this by noting that “the average mortgage interest rate on outstanding loans is continuing to decline.” In our view the recent housing data clearly shows that the impact of credit tightening is dominating what is only a modest decline in interest rates.
Kristina Clifton, CBA
The RBA have acknowledged the potential for tighter lending standards but at the same time note that “the average mortgage interest rate on outstanding loans is continuing to decline.” Tighter lending standards may have a dampening effect on house prices going forward with borrowers not allowed to borrow as much as before.
Ivan Colhoun, NAB
Speculation of a further tightening of lending standards has been a hot topic among market participants of late, with some suggesting a sharp further slowing in home lending is in prospect, which in turn will lead to lower house prices.
The remark suggests the RBA, as one would expect, is monitoring the issue but, at this stage, does not appear especially concerned and appears to be expecting that lower interest rates will provide some offset to any further tightening in lending standards.
The Bank would, in time, assess the degree to which any further tightening in standards affects its outlook for growth and progress in reducing unemployment, lifting wages and returning inflation to the midpoint of the target band.
Sally Auld, JP Morgan
The commentary was tweaked a little to reflect a slowing in housing credit growth, especially to investors, and the fact that although lending standards have tightened, the average mortgage interest rate on outstanding loans continues to decline.
So while growth in the quantity of lending might be slowing, the price of credit is not rising.
We still detect an element of the glass half full approach at the RBA, not worrying too much about the impact of tighter lending standards.
