RBA Warning: First Home Guarantee and Lending Risk
Australia’s central bank, led by Governor Michele Bullock, has signalled concerns that the federal government’s First Home Guarantee could inadvertently push some borrowers toward higher loan-to-value ratios (LVRs). While the Reserve Bank of Australia (RBA) maintains that its monetary policy focus remains on inflation and employment, Bullock acknowledged that housing policy settings can influence borrower behavior and risk profiles in the market.
What the First Home Guarantee Changes
The First Home Guarantee, expanded this year, allows first-time buyers to secure a home with as little as a 5% deposit, bypassing lenders’ mortgage insurance. The expansion, funded by the government rather than the private sector, has intensified competition for entry-level homes as buyers, brokers, and agents observe a tight market. Critics warn that lowering the cash barrier may entice more borrowers to stretch against higher LVRs and debt-to-income ratios.
Bullock’s Candid Assessment
During Senate estimates, Liberal senator Andrew Bragg pressed Bullock on whether the scheme could produce higher LVRs and riskier loans. Her reply was cautious but clear: “Yes.” She added that the extension could lead to borrowers with much higher loan-to-valuation ratios, increasing the chance of negative equity if housing prices fall.
“If people have to pay more out if they’ve got a higher LVR or a high debt-to-income ratio, they’re going to be paying more in housing payments,” Bullock said. She emphasized that this is a personal affordability concern and that borrowers must consider how repayments align with their income levels.
Governments Backing Loans, Not Banks
Bullock highlighted that, unlike traditional mortgage guarantees backed by private lenders’ mortgage insurance, the government’s guarantee shifts risk away from banks and onto public finances. She warned that the government bears the potential downside if prices retreat and borrowers find themselves in negative equity. “The risk is now on the government,” she stated, underscoring the broader fiscal implications of housing policy choices.
Investors, Supply, and Market Dynamics
The conversation also touched on investor activity and its potential to destabilize the market. Greens senator Nick McKim asked whether expectations of rising prices could spur investor demand and raise LVRs. Bullock replied that, at present, such activity hasn’t manifested in a severe way. She noted that rental stock is predominantly owned by households and that investors typically camp up as cycles turn, but didn’t see an immediate systemic risk.
Monetary Policy and Housing Prices
Responding to questions about the RBA’s role in price dynamics, Bullock reiterated that the main issue is supply, not monetary policy per se. She argued it is not the RBA’s job to dictate housing policies, and emphasized that easing monetary policy during the pandemic did not by itself drive house prices. Rather, the imbalance between supply and demand was the critical factor, with supply constraints preventing a rapid response to increased demand.
Looking Ahead
As housing affordability remains a dominant political and economic issue, the interaction between policy tools and market outcomes will continue to be scrutinized. Bullock’s statements suggest a cautious stance: while the RBA’s mandate focuses on macroeconomic stability, it remains alert to how housing policy settings can shape borrower risk profiles and potentially affect financial stability, especially if the landscape encourages higher LVRs and debt burdens.
For Australians eyeing the prospect of home ownership, the key takeaway is balanced financial planning. Potential buyers should weigh deposit requirements, mortgage terms, and the risk of rising or falling prices as they decide whether to take advantage of government guarantees or pursue traditional lending routes.
