Central bank governor Michele Bullock faced scrutiny during a Senate estimates hearing on Friday regarding the Reserve Bank of Australia's (RBA) monetary policy amid rising property prices. Bullock emphasized that the RBA's decisions over recent years should not be directly linked to the increase in property prices, attributing the issue primarily to a shortage of housing supply.

During the session, Bullock acknowledged that certain housing policies could worsen the situation. When Liberal Senator Andrew Bragg inquired whether the federal government's First Home Guarantee scheme might lead to more individuals taking on riskier loans with higher loan-to-value ratios (LVRs), Bullock responded affirmatively. "They still have a much higher loan-to-valuation ratio, which does mean that if they do find themselves in difficulties … there's a risk that that may not cover the loan if housing prices decline," she stated. "And [then] you're in negative equity. That's the main outcome."

The First Home Guarantee scheme, which launched this month, allows new buyers to enter the market with just a 5% deposit, bypassing expensive lenders' mortgage insurance. This initiative has raised concerns among buyers, brokers, and agents about a potentially hyper-competitive market for entry-level homes.

Bullock noted that while the government backs these loans, it could create additional risks for individuals. "They're a risk to individuals in the sense that, you know, they've got to meet the higher loan repayments and it's possible that they may not be able to recover the cost of the loan if the housing prices decline and they need to sell. But then ultimately that's a risk for the banks," she explained.

Senator Bragg further questioned whether the removal of income caps in the home guarantee scheme would lead to more individuals with high LVR loans and higher debt-to-income ratios. Bullock replied, "Well probably. We haven't seen the hard data yet, but probably."

She added that individuals with higher loan-to-valuation ratios would face increased housing payments, which they must consider when deciding to take out these government-backed loans. Bullock also pointed out that many potential borrowers previously chose not to borrow the maximum amount they were eligible for, likely due to discomfort with high repayment obligations.

While acknowledging the increased risks for individuals, Bullock stated that the risk to the banking sector is somewhat mitigated because they no longer have a sovereign guarantee or mortgage insurance. Instead, the government provides a guarantee, shifting the risk onto the government.

Greens Senator Nick McKim raised concerns about the potential for investors to speculate on property price increases, which could lead to market overheating. Bullock admitted that chronic housing undersupply is likely to persist for at least the next two years. "We don't see it manifesting at the moment in a severe way," she said, adding that there has not been a significant rise in high LVR or high debt-to-income loans yet.

Bullock explained that investor activity typically increases during such cycles, but financial stability concerns could arise if this leads to higher borrowing and shifts in LVRs. Senators also pressed Bullock on whether the RBA's interest rate policies and the federal government's housing policies contributed to rising prices. Bullock reiterated that the primary issue is supply, stating, "I don't think, senator, it is my job to tell the government what they should do with their policies."

She dismissed claims that the RBA's pandemic-era monetary policy, which included printing more money, was responsible for the rise in house prices. "The problem is the lack of supply relative to demand and when monetary policy eases and housing demand picks up, supply can't pick up as quickly," she concluded. "It's not monetary policy's responsibility to look after housing prices."