WESTPAC chief economist Bill Evans says analysis of the Reserve Bank board’s September Financial Stability Review does not suggest the RBA is concerned about a potential property bubble.
In a note released yesterday, Mr Evans said: ‘‘There has been considerable media attention around potential property bubbles in Australia which might constrain the Bank from cutting rates further. An appropriate opportunity to highlight that case was available in the September Financial Stability Review. There is no convincing evidence from this Review that the bank [RBA] is concerned about such prospects’’.
This report was of more than usual interest as it provided the RBA with its most appropriate vehicle for highlighting any concerns around potential property market and household balance sheets stemming from the current low interest rates, Mr Evans said. ( Note that despite the overnight cash rate being 2.5%, below the previous cyclical low of 3.0 per cent in 2008-09 the headline (before discounts) variable mortgage rate is 5.95 per cent compared to 5.75 per cent in 2008-09).
‘‘Our reading of the Review indicates that there is no high degree of concern from the bank around property market or household balance sheet excesses,’’ Mr Evans said.
There are some ‘‘responsible’’ warnings. ‘‘Of particular importance is that banks maintain prudent risk appetite and lending practices, especially in the low interest rate environment,’’ the RBA statement says.
The Bank notes ‘‘the risk profile of new household borrowing remains reasonably sound and indicators of household financial stress are reasonably low’’ and there is ‘‘a continued rate of excess repayments on home loans’’.
The centre of strongest housing activity is concentrated in NSW it is ‘‘important that those purchasing property do so with realistic expectations of future dwelling price growth’’. It is suggested that over the medium term that should be around the growth rate in nominal incomes.
The Bank is particularly focused on the strong buffer which existing borrowers have built up due to the jump in the savings to around 11 per cent and the consistent falling interest rates. It notes that ‘‘around half of households have not reduced repayments as rates have fallen’’ and ‘‘mortgage buffers remain near highs since (first measured) in 2008’’.
These buffers which are commonly known as mortgage offset or redraw facilities average 14 per cent of loan balances, indicating borrowers could cover 21 months of interest payments in the event of losing current cash flow through, say, unemployment.
The Bank accepts that some of the results particularly from the ‘‘wisest savings’’ questions in the Westpac Melbourne Institute Consumer Sentiment Survey point to "a slight shift in household preferences towards riskier assets’’.
However the Bank seemed quite relaxed: ‘‘Increased financial risk taking is an expected outcome of lower interest rates’’.
It did correctly note that the centre of the strong housing activity has been in NSW, pointing out that 40 per cent of lending approvals in NSW have been to investors responding to the recent pick up in Sydney house prices.