Reserve Bank of Australia's Role in the Home Lending Market: A Critical Examination

Strategic Insights -

The Reserve Bank of Australia (RBA) has been accused of playing a significant role in the current boom in home lending, through a combination of interest rate manipulation and regulatory changes. Last year, the RBA lowered interest rates, prompting banks to reduce lending rates for business borrowers to the same level as those for housing. This had the effect of overriding market forces, favoring home borrowers over business loan applicants. Furthermore, the RBA's policy of holding interest rates below market levels created an unprecedented demand for home finance, with nominal housing interest rates reaching their lowest level since 1974.

The RBA's actions were compounded by new regulations, including the removal of the "purpose" test for housing advances, allowing banks to use home-mortgage markets as collateral for consumption spending. This created a distorted market for bank lending, favoring housing loans over business loans. According to the RBA governor, Bernie Fraser, the advantage for housing loans is estimated to be worth about half of one percentage point on the average housing loan interest rate.

Key Takeaways:

  • The RBA's interest rate manipulation and regulatory changes have contributed to the current boom in home lending, favoring housing loans over business loans.
  • The RBA's policy of holding interest rates below market levels created an unprecedented demand for home finance, with nominal housing interest rates reaching their lowest level since 1974.
  • The RBA's regulatory changes, including the removal of the "purpose" test for housing advances, allowed banks to use home-mortgage markets as collateral for consumption spending.
  • The Commonwealth Bank, in which the Government is still the majority shareholder, led the rush to tap the housing market with a blockbuster advertising campaign.
  • The RBA's regulation imposed a disadvantage on business loans that could not be fully secured by residential housing, making them more expensive and less attractive.
  • Australians have been encouraged to borrow against the equity in their homes, despite market conditions suggesting that home values may be adversely affected by the present spate of overbuilding.
  • National Australia Bank's strategy of maintaining high interest-rate margins and spreads allowed it to maintain market leadership, and effectively called the market tune.

Statistics:

  • The RBA's interest rate reductions in 1994 lowered interest rates for business borrowers to the same level as those for housing.
  • Nominal housing interest rates were at their lowest level since 1974.
  • The RBA removed the "purpose" test for housing advances, allowing banks to use home-mortgage markets as collateral for consumption spending.
  • The advantage for housing loans is estimated to be worth about half of one percentage point on the average housing loan interest rate.

Sources:

  • Reserve Bank of Australia (1994)
  • Reserve Bank of Australia (1995)
  • Commonwealth Bank (1995)
  • National Australia Bank (1995)
  • Australian Financial Review (1995)