Barry Leddicoat

RBA warns banks, investors over taking property risks

THE Reserve Bank has warned Australian banks not to fuel real estate speculation by weakening their lending practices.

In its latest Financial Stability Review, the central bank says "the pick-up in lending for houses would be unhelpful if it was a result of lenders materially relaxing their lending standards".

And in a direct message to the Big Four banks, the RBA says "it will be important for financial stability that banks do not respond by unduly increasing their risk", the ABC reported.

The RBA's warning to banks follows similar concern from the banking regulator APRA (the Australian Prudential Regulation Authority) about relaxed lending standards in the face of rising property prices in Sydney and Melbourne.

"There is evidence that the risk appetite of some households has increased, particularly for purchasing property. The momentum in housing lending has broadened over the last six months,'' the RBA report said.

"At the time of the September 2013 Financial Stability Review, a sharp pick-up in lending to investors and repeat-buyer
owner-occupiers in New South Wales was evident, but in the past six months lending in some other states has also increased solidly.

"Present conditions in the housing market are not assessed as posing a near-term risk to financial stability.

"Nonetheless,the recent pick-up in momentum warrants close monitoring.

"It will be 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 not base their decisions on an
extrapolation of recent outcomes.

Business conditions improve as debt reduced

The RBA said that conditions for  businesses appeared to have improved.

"Balance sheets are generally in good shape with gearing and interest burdens at fairly low levels.''

"Conditions appear to have improved over recent months to be around their long-run average level
and indicators of business distress have generally continued to ease.

"In line with moderate investment intentions, businesses' appetite for debt remains subdued, although the process of deleveraging that occurred following the financial crisis appears to be now largely complete.

In the commercial property market, the disconnect between prices and rents that was reported six months ago for office property has continued and broadened beyond Sydney and Melbourne.

Household saving and borrowing 

"Households have continued to demonstrate greater prudence in managing their finances than
they did a decade ago,'' the Reserve Bank said.

"The household saving ratio has remained within its range of recent years, at around 10  per cent.

"The proportion of disposable income required to meet interest payments on household debt is estimated to have stabilised over the past six months, having previously declined in line with the fall in mortgage interest rates in
recent years.

"Many households have used lower interest rates to continue paying down their mortgages more quickly than required."