Governor Graeme Wheeler today released the Bank’s May Financial Stability Report.
He said the financial system was sound and well-placed to support expansion in the economy but was not without risks.
“Debt in the household sector remains high relative to income, and house prices are overvalued on several measures. As a result, financial stability could deteriorate if there is a sharp correction in house prices, particularly if accompanied by a reduction in debt repayment capacity.”
The LVR restrictions introduced last year had been a step to combat that, he said.
The Financial Stability Report notes that banks have rapidly reduced their share of low-deposit lending to well below the 10% limit.All banks met the first deadline for speed limit compliance at the end of March 2014, with a system-wide share of high- LVR lending of 5.6% over the first six months of implementation.
The report said the uptake of exemptions from the rules, such as for Welcome Home Loans, refinanced loans and construction, was less than had been expected, mostly because of lower-than-expected use of the refinancing exemption.
It said national house sales dropped by 11% between October and March, across all regions.
“This impact is greater than the initial expectation of a 3% to 8% drop. The drop in sales appears to have been more pronounced in certain segments of the housing market. Across different price brackets, the reduction in house sales has been concentrated in lower-value house sales.”
It said there were few signs that people were getting around the rules by going to non-bank lenders or other sources of finance.
Deputy Governor Grant Spencer said: “The restriction of high-LVR mortgages appears to be having the desired effect of moderating house price pressures and reducing the risk of a severe market correction. House sales and mortgage credit growth have reduced and we estimate that house price inflation could have been 2.5% higher in the absence of the restriction.”
Spencer said the Reserve Bank expected the speed limits to remain in place until the housing market came into better balance, which would be helped by increasing construction and rising interest rates.
“However, we will need to be confident that immigration pressures will not cause a resurgence of house price inflation. We consider that the earliest date for beginning to remove the LVR restrictions is likely to be late in the year.”
Spencer said that, over the coming year, the Reserve Bank will be undertaking a stocktake of its bank and non-bank regulations, with the aim of improving their efficiency, consistency and clarity. A further new initiative is the development of a comprehensive stress testing framework for the banking system. In the insurance sector, following the completion of licensing, the Bank is now developing a framework for ongoing insurance supervision.
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