Urbis Think Tank
The boom is over but Reserve Bank keeps us stable
Today, Luci Ellis, head of the Financial Stability Department at the Reserve Bank gave an interesting speech on the financial stability of the Australian economy. A couple of points are important for the property sector.
First, Australia had over 20 years of a credit boom commencing in the late 1980s due to lower inflation and liberalised finance. This meant that credit growth needed to exceed income growth. What we have seen in the last couple of years is the end of this adjustment. From now on, we should expect to see credit growth and income growth track closely together.
So, lesson #1: the credit boom is over
Second, regulators such as the Reserve Bank need to take action early, even before a problem becomes a problem. One example was given from the 2004–2005 period where APRA identified that mortgage insurers needed more capital to be resilient to a major downturn in the housing market, and some newer mortgage loan products were riskier than others. So APRA raised insurers’ capital requirements and raised risk weights on the riskier loans.
Lesson #2: sometimes the actions our regulators take might constrain the market, but they create stability
If you are interested in more detail, and the analogy to the platypus, you can access the full speech here.