In a speech in Melbourne last night, the governor of The Reserve Bank of Australia, Philip Lowe, said addressing supply was the key to easing the housing crisis, but tighter lending rules will help to put the economy on a more sustainable footing.
Lowe said that "households are coping reasonably well with the higher debt levels". Bad debt rates remain low, and many households have built up substantial buffers in mortgage offset accounts.
But Lowe warned that slow wages growth is making it harder for some households to pay down their debt.
"High debt levels and low wage growth are a sobering combination," he said.
Lowe said that in the mid 2000s, home building did not keep pace with strong population growth.
"It is only in the past couple of years that the rate of home building has responded," he said.
Underinvestment in infrastructure also did not keep up with increases in the population, in particular in Australia's largest cities, resulting in the current strong demand we see for housing.
High debt levels and stretched balance sheets could "make for more volatility when things turn down", said Lowe.
Lowe welcomed APRA's recent restrictions on interest only lending, and increases to LVR ratios for interest only loans.
"These new requirements should help the whole system pull back to a more sustainable position," he said.
Overall, Lowe said, "addressing the supply side of the housing market is likely to prove a more durable way of dealing with the concerns that people have about debt and housing prices than detailed supervisory guidance."
To read Philip Lowe's full speech click here.
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