RBA Warning: First Home Guarantee May Increase LVRs
The Reserve Bank of Australia (RBA) is flagging potential risks tied to the federal government’s expanded First Home Guarantee scheme. Central bank governor Michele Bullock told Senate estimates that while the policy aims to boost home ownership, it could, on balance, lead borrowers to take on higher loan-to-value ratios (LVRs). That dynamic, in turn, may raise the likelihood of financial stress for some households and alter risk profiles for lenders.
Ms. Bullock stressed that the RBA’s concern centers on the housing market’s affordability challenges and the policy settings that could push more first-time buyers toward larger loans. “Yes,” she conceded when asked whether the First Home Guarantee—by easing the deposit requirement to as little as 5%—could result in higher LVRs among new borrowers. She added that if housing prices decline, higher LVRs increase the risk of negative equity for some entrants.
The First Home Guarantee, which expands access for first-time buyers, allows qualified applicants to enter the market with a smaller upfront payment while avoiding lenders’ mortgage insurance. The policy’s rollout comes amid signs of intense competition in entry-level housing markets, prompting stakeholders to question the sustainability of demand as supply remains constrained.
Balancing Housing Policy and Financial Stability
During the questioning, Senator Andrew Bragg pressed on whether the government’s expanded guarantees and relaxed income caps would push more buyers into high-LVR territory and higher debt-to-income ratios (DTI). The governor indicated that it was likely, at least in part, while noting that hard data was not yet fully available. “If people have to pay more out if they’ve got a higher loan-to-valuation ratio or a high debt-to-income ratio — they’re going to be paying more in housing payments,” she said. This reality could influence borrowers’ decisions about how much to borrow and how much income they allocate to housing each year.
Ms. Bullock also highlighted a critical distinction: the risk-shift from borrowers to lenders is moderated by the federal government’s guarantee rather than private mortgage insurance. “The risk to the banking sector is mitigated because they don’t have a sovereign guarantee, mortgage insurance, anymore. What they have as a guarantee from the government,” she explained. In essence, the government would bear more risk if the guarantees fail to cover losses, a shift that has implications for public financial stability should prices move unfavorably.
On investor activity, Greens Senator Nick McKim asked whether renewed appetite among property speculators could fuel price rises and create systemic vulnerability. Bullock acknowledged that, as in previous cycles, investors tend to be among the first to respond to price signals, though she noted that current conditions did not show severe manifestations of risk. The Reserve Bank is monitoring loan growth, LVR distributions, and broader financial stability indicators as housing demand responds to policy changes and supply dynamics.
RBA’s Core View on Housing Prices
In addressing whether monetary policy has fueled housing price growth, Bullock reiterated that the central bank’s primary lever is interest rates, while supply constraints dictate the pace at which prices adjust. “The problem is the lack of supply relative to demand and when monetary policy eases and housing demand picks up, supply can’t pick up as quickly,” she said. She underscored that it is not the RBA’s responsibility to direct government housing policy but to assess risks to price stability and financial system health.
The conversation underscored a nuanced stance: supporting home ownership while contending with the potential for higher LVRs and increased exposure for borrowers. As Australia weighs further updates to housing policy, the interplay between guarantee schemes, lender risk, and public balance sheets will remain a focal point for policymakers and markets alike.
