Financial Crisis Didn't Stop Flow of Housing Credit, Reserve Bank Says

The Reserve Bank says the global financial crisis did not stop the flow of credit to consumers looking to buy houses, although the costs of funding those loans increased and lending standards were tightened.
RBA assistant governor of financial markets Guy Debelle said the GFC had a "material impact in pricing and structure" in the Australian mortgage market, but it did not have a material impact on the quality of housing credit provided.

"Housing finance has been readily available throughout the crisis period, with housing credit growing at about 8 per cent a year," Dr Debelle said in prepared remarks to the Mortgage Innovation Forum in Sydney on Tuesday.

"The larger banks have filled the gap left by the decline of the wholesale lenders, so that there has not been a material constraint on the quantity of housing credit available in Australia throughout the crisis."

Dr Debelle said the higher costs of funding housing loans had not been fully passed through to borrowers.

But he said the banks had made up for it by slugging personal and business loan customers by the higher cost of funding those loans.

"The average rate on variable rate housing loans has increased by around 110 basis points relative to the cash rate since mid 2007," Dr Debelle said.

"This increase, relative to the cash rate, is below the estimated 130 to 140 basis point rise in banks overall funding costs over this period.

"In contrast, banks business and personal loans have increased by even more relative to the cash rate and by more than the rise in funding costs."

Dr Debelle said the fact home lending rates had not increased by as much as the rise funding costs reflected "the competitive state of the current market".

The assistant governor also said how mortgage rates moved had an impact on the central bank's monetary policy deliberations.

"While interest rates on mortgages have increased relative to the cash rate, the Reserve Bank is able to take account of those changes in its policy deliberations," Dr Debelle said.

"The cash rate determined by the Reserve Bank is still the major determinant of the interest rate structure in Australia, including that of mortgage rates."

The outlook for the smaller lenders had improved since mid-2009, he said, with the securitisation market starting to recover.

"The cost of long-term and short-term wholesale funding has also decreased since mid-2009, although the cost of deposits remains high,"
Dr Debelle said.

"Consistent with this, the smaller lenders' market shares have risen slightly over recent months, though they are unlikely to return to pre-crisis levels any time soon."

Tightening lending standards had seen some banks reduce their maximum loan to valuation (LVR) ratios from 95-97 per cent to about 90 per cent during 2009, Dr Debelle said.

Other changes have included higher interest rate buffers, increased "genuine savings" requirements and greater difficulty in obtaining low-doc and non-conforming loans.

This has resulted in the share of new owner-occupier housing loans with an LVR of above 90 per cent fall to 17 per cent at the end of 2009, compared with 27 per cent in the March quarter.

"The share of low-doc loans has declined to about 7 per cent," Dr Debelle said.

Dr Debelle said the provision of mortgage credit in Australia was likely to continue to be adequate in a competitive marketplace.

Latest NewsFinancial Crisis Didn't Stop Flow of Housing Credit, Reserve Bank SaysMonday, 26 December 2016

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