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In the last year, 40 per cent of loans written in Australia have been interest-only. (Flickr: Diana Parkhouse )
The Reserve Bank governor says negative gearing is
fuelling an unhealthy investor appetite for interest-only home loans and
has slammed banks for signing up people for loans who should not have
them.
Just five weeks before the federal budget, Australia's
leading independent economic voice has inserted himself once again into
the political fight over housing affordability and concerns of a
dangerous property bubble. Philip Lowe said the "ongoing increases in indebtedness and rising housing prices" were a "risk to the future health of the Australian economy. Stretched balance sheets make for more volatility when things turn down".
For the first time the Reserve Bank directly linked "taxation arrangements" to the "unusual" popularity of interest-only loans in Australia.
Negative gearing gives investors a tax advantage in extending out the term of their loans.
But it means that the borrower is not paying down the principle of the loan, which means if the housing market turns down, they will be more exposed.
In the last year, 40 per cent of loans written in Australia have been interest-only.
Last week APRA stated it wanted that pulled back to a maximum of 30 per cent.
Dr Lowe said this was needed to make the system more "sustainable" and improve "resilience".
Household debt 'high and rising'
He also sounded the alarm on Australia's crippling level of household debt, saying "the level of household debt in Australia is high and it is rising".Edge of a cliff? Housing in 2017
There are plenty of forecasts around the Australian housing market in 2017 - and few are positive.
"This compares with growth of around 3 per cent in aggregate household income."
And although many Australians are "coping reasonably well with the higher debt levels" a lot of Australians are doing it increasingly tough in difficult economic circumstances.
"Slow growth in wages is making it harder for some households to pay down their debt," he said.
"For many people, the high debt levels and low wage growth are a sobering combination."
Banks also in RBA governor's sights
Dr Lowe also hit out at banks for writing loans for people who could barely afford them and could be caught out if the economy or their personal circumstances change.The governor said despite a litany of banking scandals in recent years, "too many loans are still made where the borrower has the skinniest of income buffers after interest", with banks "assuming that people can live more frugally than in practice they can, leaving little buffer if things go wrong".
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Dr Lowe failed the federal and state governments for "insufficient investment in the transport infrastructure needed to support our growing population" which in turn "pushed housing prices up" as buyers competed to purchase houses that were close to good public transport links.
Housing is not the only concern for the Reserve Bank though — the governor described the labour market as "soft", saying "growth in employment is slow and wage growth is the lowest in some decades".
It is a dangerous combination when coupled with the record level of debt households are carrying.
Dr Lowe is also seemingly ruling out any interest rate rise in the near term.
"We will want to see an improvement here before we can be confident that growth in the overall economy is strengthening," he said.
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