Historically low interest rates may encourage Australians to take on too much debt and suffer when inflationary pressures rise, Reserve Bank of Australia governor Glenn Stevens said yesterday.
His warnings echo those of US Federal Reserve chairman Ben Bernanke, who said yesterday that Governments should look towards balancing budgets to avoid hyperinflation.
“At 3%, the overnight rate is at the lowest level since the early 1960s,” Stevens said. “The debt servicing costs of households have fallen faster and further than in previous cyclical episodes and some scope remains to ease monetary policy further.”
The governor’s comments come as recent reports show that while weekly home loan repayments have fallen from $2,056 last year to just $1,831 in February, the average loan size for first home owners has increased by $52,000 in the last two years.
Stevens said the RBA’s future meetings to determine further interest rate cuts will take into account the amount of new debt being accumulated.
“It would be counterproductive if further reductions in interest rates induced a large number of marginal borrowers into debts they could service only at unusually low interest rates,” he said.
His comments are also likely addressing recent figures from the Bureau of Statistics that show the number of people applying for the Government’s first home owner’s grant surged upwards in April.
But Mortgage Choice senior corporate affairs manager Kristy Shephard says that lenders are shielding themselves against possible mortgage delinquencies by upgrading their risk assessment procedures.
“I think the real tightening that’s occurred with the lending criteria has combated any risk involved with borrowers overstepping the market. We’ve noticed a real constricting of who they will lend to and how much they will lend.”
“All lenders will factor in a certain amount of rate rises into a risk assessment, and lately those have been raising assessment rates. They also calculate rising living costs.”
Shephard also says that while some first home owners may have overextended themselves at the beginning of the first home owners boost, it remains to be seen how much of an impact that will have on the market.
“The situation we’re experiencing with really low interest rates is encouraging a lot of people into the market. Certainly we recommend they create a [financial] buffer, which is very easy to do in today’s environment.”
Patrick Stafford is a freelance journalist and a former deputy editor of SmartCompany.
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