RBA keeps an eye on house price growth but system is resilient

RISKS from the retail property sector are “elevated”, house price growth is being “watched closely”, and cyclically low interest rates and rising asset prices “create a risk of excessive borrowing”, according to the Reserve Bank.

However, banks could cope with significant economic deterioration, the central bank said in its biannual Financial Stability Review, released on Friday.

The RBA noted that financial systems in Australia and overseas have been “resilient to a substantial shock” from the COVID-19 pandemic.

Banks had been able to cushion the economic impact of the pandemic and had supported the recovery through loan repayment deferrals and new lending, thanks to their high capital levels, significant holdings of liquid assets and their ongoing profitability, it said.

While banks do face some challenges in rising non-performing loans as a result of the economic downturn and refinancing their funding from the term funding facility in three years’ time, both of these “seem very manageable” and risks in other financial institutions “appear contained”.

“Banks’ non-performing loans have increased, but by less than expected, and their current provision balances are expected to be sufficient to absorb the impact of future defaults,” the RBA said.

On the housing market, it said cyclically low interest rates and rising asset prices “create a risk of excessive borrowing” and risks from rising asset prices and debt could build, particularly if lending standards are weakened.

“Persistent increases in asset prices could lead to expectations that rises will continue and so increase risk-taking and borrowing, especially given low interest rates,” the RBA warned. “This could push asset prices above their fundamental values.”

RBA governor Philip Lowe (pictured) said on Tuesday that the RBA was “monitoring trends in housing borrowing carefully”.