Five weeks from the 2016/17 Federal Budget, Reserve Bank (RBA) Governor Philip Lowe has warned of a dangerous property bubble and ‘unusual’ popularity in interest-only loans.
The RBA has directly linked taxation arrangements to the unusual recent popularity of interest-only loans in Australia, with negative gearing giving investors a tax advantage in extending the terms of their loans. The RBA’s concerns with interest-only loans relate to the borrower not paying the principal of the loan, meaning if the housing market turns down and or interest rates rise, the borrower is more exposed.
Speaking at the RBA Board Dinner on Tuesday night, Dr Lowe highlighted his concerns about rising household debt. Australia’s household debt is now at 125 per cent of gross domestic product, well above other nations such as Britain and the US. Dr Lowe also hit out at banks for writing loans to people who could barely afford them and could be in danger of failing to meet payments should the economy or their personal circumstances change.
In the last year, 40 per cent of all loans written in Australia were interest-only loans. Last week, the Australian Prudential Regulation Authority (APRA) announced that it was now expecting all lenders to limit interest-only loans to 30 per cent of all new mortgage lending.
“Lenders need to ensure that the serviceability metrics that they use are appropriate for current conditions. A reduced reliance on interest-only housing loans in the Australian market would also be a positive development,” Dr Lowe said.
What do you think? Has relaxed lending criteria resulted in an unsustainable housing boom? Should interest-only loans be limited to less than 30 per cent of all loans written? Are you concerned that we are in a housing bubble? Would you or your family be adversely affected by a fall in housing prices or an interest rate rise?