The Weekend Australian

House prices threaten debt blowout

- RICHARD GLUYAS

The Reserve Bank has warned that the financial system could be rocked if any blowout in debt is accompanie­d by a correction in surging asset prices, such as property.

In its biannual financial stability review, released on Friday, the RBA canvassed the downside of the boom in property prices if conditions were to change.

While the growth in asset prices, including property and equities, had not been associated with a significan­t increase in debt, it could lead to “over-exuberance”, increased risk-taking and higher debt.

“In this situation lending standards could weaken, with asset prices being pushed above their fundamenta­l values,” the review said. “A correction in asset prices, if borrowers’ income were to fall and so they defaulted on debt repayments, would expose lenders to large losses on the increased debt, particular­ly if the quality of that debt had been eroded.”

Risks were higher in some assets such as housing, where prices — and debt to a lesser extent — had picked up “notably” in recent months.

Dwelling prices rose 2.6 per cent last month — the strongest rise in 33 years. Prices are now at a record level, up 7 per cent since the COVID trough last September.

Regulators, however, have no mandate to target property prices or housing affordabil­ity, stressing repeatedly in recent months that they would impose measures to rein in the boom only if banks were loosening their credit standards.

While there was no evidence of this so far, the review said the RBA and other regulators were watching the market closely.

The pandemic had also created additional challenges for certain assets, with lower immigratio­n and changes in preference­s introducin­g greater uncertaint­y in the apartment market, particular­ly in inner-city areas.

The RBA stressed it was particular­ly important for the financial sector to avoid “excessive risktaking” in an environmen­t where asset prices were rising and the cash rate was at a record low

0.1 per cent.

“Increased risk-taking by lenders could take the form of looser lending standards for individual loan assessment­s, or a relaxation of internal limits on the share of riskier loans they make,” the review said.

“Even if lenders do not weaken their own settings, increased risktaking by optimistic borrowers could see a deteriorat­ion in the average quality of new lending.

“This would weaken the resilience of businesses and houseof holds, and so the financial system, to future shocks.

“Increased risk-taking would fuel rising debt, from already high levels, increasing the debt-related risks to the economy and financial system from a fall in asset prices and borrowers’ income.”

The review said the vast majority of households and businesses to defer interest payments had now resumed full repayments.

Official data last week showed that the value of deferred loans, which peaked last year at $270bn, had now fallen to only $14bn, or about 0.5 per cent of total loans. However, the RBA warned that some increase in household and business financial stress was likely, as temporary support measures were withdrawn and borrowers depleted financial buffers.

“Households and businesses that derive their incomes from sectors most heavily affected by the pandemic face an elevated risk of repayment difficulti­es if their buffers prove to be insufficie­nt,” the RBA said.

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