RBA warns of potential risks in the First Home Guarantee
Australia’s central bank boss, Michele Bullock, used a Senate estimates hearing to highlight how housing policy settings, particularly the federal First Home Guarantee, could influence borrowers’ risk profiles and the broader financial system. While the Reserve Bank of Australia (RBA) has long distanced itself from property price movements, Bullock conceded that certain policy levers could indirectly shape lending standards and borrower choices.
During the grilling, Liberal senator Andrew Bragg pressed Bullock on whether the First Home Guarantee, which lets new buyers enter the market with as little as a 5% deposit, could raise loan‑to‑value ratios (LVRs) and, in turn, riskier loans. Bullock acknowledged the possibility, saying, “Yes.” She elaborated that as LVRs rise, borrowers are more exposed to adverse housing price shifts, potentially ending up in negative equity if prices decline.
The scheme in question is expanded beyond prior reach, with income caps relaxed and broader access intended to boost entry into the market. It is funded by government guarantees rather than private mortgage insurance, a distinction Bullock notes as a factor in risk allocation between borrowers and lenders. She warned that the government bears greater exposure if housing prices falter, while the private sector’s certainty around mortgage insurance is diminished under this arrangement.
Bragg’s line of questioning aimed to understand whether the policy could alter household debt dynamics. Bullock suggested that as households commit more of their income to potential mortgage payments, the incentive to borrow up to the maximum available may wane, but many would still push further than in prior years. “We haven’t seen the hard data yet, but probably [more high-LVR loans],” she said, adding that high LVRs can heighten monthly repayments and risk for individuals, even as the banking sector’s risk profile changes with the government guarantee rather than sovereign backing.
Why lenders and regulators are watching risk profiles
Bullock emphasised that the financial system’s stability depends on more than monetary policy alone. While the RBA’s policy levers influence demand and credit conditions, she argued that housing supply remains the core issue driving prices. “The problem is the lack of supply relative to demand,” she stated, noting that easing monetary policy during the pandemic did not immediately translate into cheaper or more available homes because the construction and listing pipeline could not keep pace.
Investors re-entering the market were also a topic of concern. Greens senator Nick McKim asked whether a rebound in investor activity might inflate LVRs and borrowing, creating vulnerabilities. Bullock responded that while investor activity often picks up early in cycles, there was no current, severe manifestation of that trend. She cautioned that a sustained rise in borrowing by investors could modify risk dynamics, but a decisive impact had not yet emerged.
Policy responsibility and the supply-demand imbalance
Senators challenged Bullock on accountability: to what extent should the RBA, with its mandate to control inflation and financial stability, comment on housing policy that sits squarely in government’s hands? Bullock replied that it is not the RBA’s job to dictate policy choices, particularly relating to supply. However, she stressed that policy settings can have ripple effects on household debt and asset prices, especially in a market already stressed by supply constraints.
In sum, Bullock’s testimony underlined a simple truth: without addressing housing supply, even well-meaning policies like the First Home Guarantee can contribute to riskier loan structures in the hands of borrowers. The RBA’s stance remains cautious, acknowledging potential financial stability concerns while pointing to supply-side constraints as the primary driver of price pressure.
What this means for homebuyers and the market
For prospective buyers, the implications are clear. A government-backed guarantee can lower the upfront hurdle, but it may also elevate monthly costs for those at the high end of borrowing limits. For the broader market, the evolving interaction between policy, demand, and supply will continue to be a focal point for regulators, lenders, and homeowners as housing affordability remains a central political and economic issue.
