Risky Debt in Australia Could Magnify Potential Downturn, Central Bank Governor Says

(Bloomberg) -- Australia’s central bank No. 2 official Guy Debelle says risky borrowing is more likely to be an accelerator to an economic downturn rather than its source, in an address discussing the impact of lending curbs.

“If a negative shock were to hit the Australian economy, particularly one that caused a sizeable rise in unemployment, then the risk on the household balance sheet would magnify the adverse effect of that shock,” Debelle said in the text of a speech Thursday. “This would have first order consequences for the economy and hence also for monetary policy.”

Risky Debt in Australia Could Magnify Potential Downturn, Central Bank Governor Says

Australian regulators tightened lending as investors poured into east coast property markets, taking advantage of record-low interest rates. The measures limiting the availability of credit have weighed on the market, with a slide in housing now in its second year. Prices in Sydney and Melbourne were down 7.4 percent in October from a year earlier and 4.7 percent, respectively.

While the Reserve Bank of Australia has kept its cash rate unchanged at a record-low 1.5 percent since August 2016, regulators have cracked down on riskier loans such as interest-only mortgages that are popular with property investors and enforced stricter expense verification that’s curbing the amount people can borrow. On top of that, Australians carry some of the highest household debt in the developed world.

“The regulatory measures have significantly reduced the riskiness of new housing lending,” Debelle, deputy governor of the RBA, said in the speech in Melbourne. “A smaller share of new loans are to investors, are interest-only, have high loan-to-value ratios or are to borrowers more likely to have difficulty repaying the loan.”

Debelle did say that tighter lending to developers was “a higher risk to the economic outlook” than the direct effect of stricter lending standards on households.

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