Reserve Bank gets please explain over possible new home loan rules

The Reserve Bank has been given a 'please explain' by the Senate's Economics Committee.

It has been ordered to appear this Thursday to justify an apparent about-face on macroprudential policy.

Last week, the RBA revealed it was in talks with other regulators to try and cool the growth in lending to property investors.

"I have certain scepticism about macroprudential tools as a panacea, but I remain open to using them if it seems sensible to do so and that's the kind of thing we have in mind right now," acknowledged the bank's governor Glenn Stevens in a panel discussion last week.

In last week's Financial Stability Review, the RBA revealed it was in talks with other regulators about how to dampen investor loan demand, but that has earned it the ire of the Senate's Economics Committee.

The committee's chairman Sam Dastyari says it is time for the RBA to come clean on its plans.

"We're hauling them before a Senate inquiry. We want some explanation. They've been out there running this in the media for the past fortnight now, and the Australian public need to know if there's going to be some consequences from these kinds of decisions," he said.

Labor Senator Dastyari is warning there could be unintended consequences from macroprudential controls and he has ordered the RBA to front the committee this Thursday to come clean.

"If there is legitimate concern about an overheating housing market and they want to take the pressure out of that, I think in principle everyone agrees," he said.

"But let's not kid ourselves these things are easy and that there isn't going to be any consequences from making these decisions."

However, the director of the Australian Centre for Financial Studies, Deborah Ralston, says targeted lending controls are more likely to have only the desired effects than blunt policy shifts, such as raising interest rates.

"The more direct your policy is, the less likely you're going to have unintended consequences," she said.

"If you look at the extreme example of, say, increasing interest rates, the potential for unintended consequences is enormous right across different sectors of the economy."

Range of policy options

Some are not convinced there is a problem that needs to be addressed.

"When you look at growth across the whole investor spectrum in the housing market it's still quite modest and, in fact, a lot lower than the Reserve Bank has tolerated in the past," said JP Morgan's chief economist Stephen Walters.

There are still questions about how macroprudential would be implemented in practice, especially if the RBA is planning to limit low deposit lending.

"I'm concerned about the distributional impact that could have. Policies that might potentially lock new home buyers out of the market would make it harder still for young Australians to buy their first home," said the Opposition's shadow assistant treasurer Andrew Leigh.

Deborah Ralston says a better way would be to impose higher risk weighting on investor loans.

"We already vary the weightings according to the value that's put up with the loan, and also according to whether it has mortgage insurance or not," she said.

Figures released by the RBA on Friday also show household debt has hit a record high relative to disposable income.

However, the Finance Minister says he is not worried about prices in Sydney and Melbourne and will leave the Reserve Bank to do its job.

"Prices in the housing market are always a matter of supply and demand and, you know, obviously if prices are too high over an extended period, there will be a market response to that," he said.

Some analysts, such as Bank of America-Merrill Lynch's chief economist Saul Eslake, are calling for a wind back of negative gearing - perhaps limiting or ending the tax deduction for anyone who purchases after the policy change is announced, thus grandfathering existing investments and protecting them from the change.

However, Stephen Walters is not convinced of such measures either.

"I think we need to look at the full suite of factors that actually drive housing investment and, clearly, negative gearing is one of those but, of course, negative gearing applies to any asset purchase with debt, not just housing," he argued.

With almost 1.3 million taxpayers using negative gearing, it could be political poison for any government courageous enough to touch it.