US-China our big concern
But RBA unfazed by housing dip
A RISE in trade tensions between China and the US poses a growing risk to the nation’s economy, the Reserve Bank has warned.
But Australia’s central bank is not fazed by the fall in house prices in Melbourne and Sydney nor is it worried about the ability of homeowners to repay their loans as interest rates rise.
The assessment was delivered in the RBA’s latest twice-yearly Financial Stability Review, released yesterday.
The health check on the nation’s financial system and economy comes during a week in which global markets were shaken by a sharp selldown on Wall St.
“Downside risks to growth have become more prominent since the previous review, particularly due to the rise in trade protectionism,” the RBA report states.
While the fallout from the trade war between the world’s two biggest economies had so far been “relatively modest”, it might not remain the case, it states.
“If the imposition of trade barriers were to intensify, or if it materially affected business sentiment and decisions, the negative impacts on economic growth could be more significant,” the RBA report said.
More than $90 billion was stripped from the Australian share market this week in a rout triggered as US investors reassessed their expectations about the pace of interest rate rises in the world’s biggest economy and fretted about trade tensions with China.
The RBA pointed out the era of ultra-low interest rates spawned by the global financial crisis meant investors had been willing to accept more risk for less return.
It cautioned that this could leave them exposed to unexpected increases in interest rates or a global shock.
“With the price of risk so low, there is a heightened possibility that an increase in expected or realised inflation or a negative growth shock could result in a significant and widespread rise in volatility and repricing in financial assets,” the RBA report said.
“Some investors may not be well prepared for such repricing, with the potential for some large losses and reactive sales of assets.”
On the domestic front, the RBA said the slowdown in the housing market triggered by tighter lending standards was a “positive development” for financial stability.
While household debt was high, homeowners were well placed to meet their repayments even as interest rates rose, it said.
“The majority of this debt is well secured, with only a small portion having a high loan-tovaluation ratio,” the RBA said.
“Further, most of the debt is owed by households that appear well placed to repay the debt.”
ANZ head of Australian economics David Plank said the RBA had expressed “a bit more caution” about the global economic outlook but was comfortable with the housing market.
“Overall, the clear sense from the review is that the economy is managing the slowdown in the housing market relatively well,” he said.
JP Morgan analyst Ben Jarman said the review showed the RBA was “still quite sanguine” on the risk posed to the broader economy by the nation’s housing market.
“Somewhat surprisingly, RBA analysts state that the risks of high household debt appear to be to the economy, rather than being a large risk to the financial system,” he said.
“Presumably this is meant to imply that a fall in consumption induced by high household debt would not create a systemic crisis.”