The Weekend Australian

RBA sounds warning on housing

- DAVID ROGERS MARKETS EDITOR

Australia’s housing market is being “closely watched” by regulators as cyclically low interest rates and rising house prices “create a risk of excessive borrowing”, according to the Reserve Bank.

While strong growth in Australian house prices in recent months hasn’t been accompanie­d by a significan­t build-up in debt, “globally risks associated with asset prices and debt could build”.

In the bank’s semi-annual Financial Stability Review, it cautioned that “a sustained period of rising asset prices may lead to overexuber­ance and extrapolat­ive expectatio­ns, with increased risktaking and leverage in an environmen­t of accommodat­ive financial conditions”.

“In this situation lending standards could weaken, with asset prices being pushed above their fundamenta­l values,” the RBA 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.”

The explicit warning of the consequenc­es of excessive risktaking came after CoreLogic’s national house price index rose 2.8 per cent in March, the fastest pace since 1988.

CoreLogic’s Home Property Value Index rose 5.4 per cent in the first three months of the year.

House prices in Sydney rose 3.7 per cent in March and 6.7 per cent over the first quarter.

The RBA noted that in Sydney and Melbourne house prices are now “a little above the historical peaks they reached in 2017-2018”, even though house prices in regional areas rose by 11 per cent over the past year compared with 5 per cent in capital cities.

RBA governor Lowe said on

Tuesday that the RBA was “monitoring trends in housing borrowing carefully and it is important that lending standards are maintained”. In its latest financial system health check on Friday, the central bank warned that “in an environmen­t of accommodat­ive financial conditions with rising asset prices it is particular­ly important that there is not excessive risk-taking by the financial sector”.

The RBA noted that 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. But even if lenders did not weaken their own settings, “increased risk-taking by optimistic borrowers could see a deteriorat­ion in the average quality of new lending”.

“This would weaken the resilience of businesses and households, and so the financial system, to future shocks,” the RBA said. “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.”

In a veiled warning of “macroprude­ntial tools” — such as formal limits for debt-to-income and loan-to-income ratios — to cool the property market, it noted an improvemen­t in lending standards from the mid-2010s “helped to ensure borrowers were well placed to weather the economic shock over the past year, demonstrat­ing the benefits to the financial system and the economy of appropriat­ely controllin­g risks.”

In March 2017, APRA tightened macroprude­ntial policies due to “an environmen­t of heightened risks” and APRA chair Wayne Byres said the regulator “views a higher proportion of interest-only lending in the current environmen­t to be indicative of a higher risk profile” in the housing

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