House Prices and Financial Stability: An Australian Perspective

Strong growth of household indebtedness and housing prices has raised a range of financial stability concerns in Australia. While the main policy response has been to tighten lending standards, two quantitative portfolio benchmarks have also been used to help address the emerging macro-financial risks. These benchmarks have dampened activity in the types of loans targeted, though there are a number of questions around their use over the medium term. In particular, it is difficult to directly measure the effectiveness of these policies in addressing financial stability risks and hence to calibrate them accordingly. It is also important to consider whether there are undesirable consequences of such measures. More generally, the use of quantitative benchmarks to address financial stability risks is a relatively new policy approach in Australia and the practices are likely to evolve as more experience is gained.