Home deposit rules could stem bubble

A senior Reserve Bank of Australia official has floated the idea of regulating the size of deposits home buyers must provide to banks, in an attempt to prevent credit-fuelled asset bubbles.

Amid a raging debate over whether central banks should intervene in asset bubbles, an assistant governor at the Reserve Bank, Guy Debelle, yesterday pointed to moves by Asian governments to tighten lending standards.

Hong Kong, for example, brought in rules last month requiring home buyers to tip in a higher proportion of cash when purchasing properties in an effort to prevent a property bubble. Some flats in Hong Kong have have risen in value by as much as 40 per cent this year.

Asked what central banks could do to address bubbles, aside from raising interest rates, Dr Debelle noted this tightening in loan-to-valuation ratios (LVRs).

''At the moment ... Singapore and Hong Kong are concerned about what's going on in property prices; they're changing maximum LVRs,'' he said at a financial services forum in Sydney.

Australian banks have already tightened the amount of money they will lend to first-home buyers, after low interest rates and generous handouts fuelled a surge in demand.

But as house prices rise, economists are discussing ways to control asset bubbles aside from using rising interest rates, regarded as a blunt instrument because it dampens activity across the economy.

However, mandating how much banks can lend to prospective buyers would be an unorthodox step for regulators, and Dr Debelle stressed that the debate was incomplete.

Banks have already tightened lending standards in the sectors of the market seen as most risky. Before the crisis banks would lend 100 per cent of the value of a property, but this has fallen to about 90 per cent, with tougher standards for first-home buyers.

Banks also require borrowers to take out mortgage lender's insurance for all loans with a deposit below 20 per cent, at a cost of several thousand dollars.

The companies selling this insurance - Genworth, QBE LMI and St George - have posted steady rises in profits during the recession, even in 2008 when mortgage defaults peaked, the report said.

Mortgage insurers in the United States and Europe have been hit by higher default rates and hefty falls in house prices.

Moody's has a negative outlook on the sector in Australia, but said the number of defaults would not reach the levels seen in Europe, in part because high immigration and the strong economy would support house prices.

A report by JPMorgan and Fujitsu last month said that tighter lending standards meant that a return to to the ''re-gearing'' that drove a massive jump in Australian house prices between 2002 and 2006 was unlikely.

- © Fairfax NZ News