Transcript of Question & Answer Session Space and Stability: Some Reflections on the Housing–Finance System

You said that household affordability is not stretched, but what is your basis for that, what do you mean?

I said household finances aren't stretched and that's a different thing and I guess there's a number of metrics that we use for that. Loan sizes to – of new loans to income haven't increased that much. But I think the real corker is the fact that so many people are paying off their existing loans ahead of schedule. That's saying they can manage the required repayment comfortably because they're actually paying more voluntarily.

So based on that, are you saying that – and we've seen data recently that house price growth is easing back a little bit now – do you see that the risk of a housing bubble or prices escalating is easing now?

Well I think it's been an interesting balance. As we've said publicly before the recent run up in prices was – it was expected that as you lowered interest rates there would be some effect of that on house prices and that's a natural part of the transmission mechanism of monetary policy. And the policy challenge is to work out how much of that is the expected amount you'd expect a transmission of monetary policy and at what point it's got too far. And certainly the fact that investor housing has been the strongest piece has given us some pause.

But I think the point being – and this is why we've emphasised serviceability, the point being that there's only a certain extent to which it can run. The fact that interest rates are low is not allowing people to borrow infinite amounts because of the way that serviceability calculations are being done, and that kind of limits how much people can borrow and therefore how much people can bid up house prices. And so we see that leg of lending standards being incredibly important as doing that.

And so as long as that borrowing prudence is there, you know you can never say never, but at this point in time as long as that holds we're not yet seeing – I mean you think back to what happened in 02 and 03 and all of the metrics are looking very different and in particular housing credit growth is not growing that strongly overall. And in fact you are seeing although auction clearance rates are still quite high there are areas where that's not the case, and you are starting to see things come off a little bit, and I think that's just saying well interest rates were low, certain people who weren't so bound by the serviceability requirements were able to bid up house prices a bit, but there's only so many of those people, and there's a point at which you've done that adjustment and then it's done. And so the point is once you get to that point you want to make sure that you don't say oh you know house prices are so high now we need to make sure that people can afford these high house prices by letting them borrow more, I mean that's – that's what happened in the subprime crisis in the US and that's where the disasters can go wrong.

So are you saying that from that there's very little chance that then in Australia there would be any support or need then for any sort of macroprudential controls? And yet we saw from the OECD that they said it should remain on the table to be considered.

Well I think prudential policy and prudential supervision is always an important part of the tool kit for responding to financial stability risks; that's why APRA has a financial stability mandate. But where Australia – the Australian authorities have tended to depart from some of the other people who've talked about this globally is we don't see much value in carving out a particular aspect of the prudential framework under separate governance and manipulating it separately. I mean when we're talking about leaning on serviceability and making sure serviceability is being tightly controlled, that's – that's prudential and because it's for systemic risk reasons you can call it macroprudential but we just call it competent prudential.

Anecdotally Chinese buying has attracted a lot of attention and it's outside your domestic monetary policy controls. Is the Reserve Bank concerned about the size of this? Have you got any measure on offshore buying?

Well I would just note that there is a Senate inquiry running at the moment on this, and I think the facts about foreign buying of property will come out there. I will note that there has also been a large number of Australian residents who happen to come from greater China and I wonder whether some of the more sort of high temperature commentary about this has not been able to distinguish between people who have moved here versus people who don't live here, and I think the numbers will come out on that in the course of that Senate inquiry.