Banks and bank investors are stuck with slow growth and with the dynamics of "housing price growth… [that will be] slower in future than in the previous 30 years," a senior Reserve Bank of Australia official said yesterday.
Luci Ellis, head of the financial stability department at the RBA,
told the Citibank Property Conference in Sydney that "if trend growth in housing prices [is] slower in the future than in the past," - as the RBA forecasts - then "trend housing credit growth will necessarily be slower too."
"This has obvious implications for the rate of growth of bank balance sheets and profits. We have been making this point for a while.
"Financial stability requires that the owners of banks accept that domestic balance sheet growth will be slower from here than it was in the previous 20 years or so.
"We would not want banks to ease their lending standards to make more loans and bring back the boom times. Nor would we want them to cut costs in a way that impinges on their risk-management capabilities."
Ellis told the conference that the period when households withdrew equity from the housing stock "has ended. Australia has returned to a more normal behaviour of households contributing equity, in net terms, to the expansion of the housing stock."
She also observed that if "housing price growth is cycling around a lower average, there will be more periods when prices are falling a little in absolute terms."
"This has implications for the loss given default (LGD) in mortgage portfolios.
"In my view, this vindicates APRA's decision to require a higher LGD floor than the 10 per cent minimum built into the Basel rules for banks using their own models.
It also vindicates its decision to require higher risk weights for non-standard and high loan-to-valuation loans for lenders that do not use their own models."