RBA rejects home loan lending cap

In a bid to prevent wild swings in house prices, some countries overseas have recently toughened their restrictions on how much of a property's purchase price can be financed by debt.

But the head of the Reserve Banks' financial stability department, Luci Ellis, yesterday said that similar caps in Australia did not make sense and threatened to make it harder for first home buyers to enter the market.

''The cap would have to be set very low to be binding on existing home buyers who are trading up,'' Dr Ellis said in Sydney. ''First home buyers would be squeezed out, but most buyers would be little affected.''

Overseas experience with caps on lending had tended not to control prices, she said. Instead, caps had lowered the number of people who defaulted, because buyers would still have equity in their home if prices fell.

"The cap would not prevent boom-bust cycles in housing prices," she said.

Lower default rates were ''not a bad thing'', Dr Ellis said, but the primary task of regulators was to ensure the economy's stability, rather than to shield banks from lower default rates.

Countries that have caps on borrowing include Hong Kong, which in late 2010 required all properties costing $HK8 million ($A1 million) to $HK12 million to have loan-to-valuation ratios no greater than 60 per cent.

In Australia, by contrast, banks can lend home buyers more than 90 per cent of the purchase price.

The comments come amid ongoing concern about the high level of mortgage debt in Australia - with latest figures showing household debt is worth 150 per cent of income.

Despite playing down the need for caps on lending, Dr Ellis acknowledged the need for home buyers to save a deposit.

''People need to provide some deposit when they buy a home. It protects them if something goes wrong for them, like a job loss or illness, especially if it happens at the same time that housing prices are falling,'' she said.