Advertisement

RBA warns on housing prices

Tread very carefully in the housing market, because rising prices and low interest rates won’t last forever – that’s the message for both banks and their customers.

The financial system is performing strongly, the Reserve Bank of Australia said in its twice-yearly financial stability review released on Wednesday.

But there’s a catch.

The more settled environment, with its more moderate rate of credit growth, could limit the potential sources of profit growth for banks, the RBA said.

“It will be important for financial stability that banks do not respond by unduly increasing their risk appetite or relaxing their lending standards.”

And housing loan practices warrant “particular attention”.

Higher housing prices and increased borrowing by households were expected results of the interest rate cuts so far.

But they could also encourage speculation, the RBA warned.

Strong investor demand for housing can exacerbate property price cycles and foster unrealistic expectations for further capital gains, the RBA said.

As well as increased lending by banks, demand from non-residents and self-managed superannuation funds was boosting demand.

Although the housing sector is a long way from it right now, a boom in speculative demand could eventually encourage an oversupply of new housing and a subsequent price drop.

Lending for both repeated home-buyers and investors has been rising for some time in NSW, but has more recently been picking up in other states as well.

“The pickup in lending for housing would be unhelpful if it was a result of lenders materially relaxing their lending standards,” the RBA said.

“Unhelpful” is a word central bankers use when they actually mean “really bad”.

There has been no broad deterioration of lending standards yet, but there are signs that some lenders are adopting “less conservative serviceability assessments” when deciding how much to advance to some borrowers.

In other words, they are lending to borrowers who might previously have been refused a loan because their incomes were too low or unreliable.

And the RBA clearly does not want that practice to become any more widespread.

“It is important for both investors and owner-occupiers to understand that a cyclical upswing in housing prices when interest rates are low cannot continue indefinitely, and they should, therefore, account for it in their purchasing decisions,” the central bank said.

Don’t say you were never warned.

Advertisement
Stay informed, daily
A FREE subscription to The New Daily arrives every morning and evening.
The New Daily is a trusted source of national news and information and is provided free for all Australians. Read our editorial charter.
Copyright © 2024 The New Daily.
All rights reserved.