September 24, 2014 / 2:06 AM / 5 years ago

Australia's central bank steps up warnings on mortgage lending

SYDNEY, Sept 24 (Reuters) - Australia’s central bank said additional steps might be taken to tighten banks’ lending practices as it warned the housing market was becoming “unbalanced” with investor activity outstripping those of home owners and businesses.

In a 64-page Financial Stability Review report, the Reserve Bank of Australia (RBA) said the crucial question for macroeconomic and financial stability is whether lending practices are conservative enough for the current combination of low interest rates, strong house price growth and higher household indebtedness.

“The Reserve Bank’s assessment is that the risk from the current strength in housing markets is more likely to be to future household spending than to lenders’ balance sheets,” it said.

“However, the direct risks to banks will rise if current rates of growth in investor lending and housing prices persist, or increase further.”

As a result, the RBA said it is discussing with the Australian Prudential Regulation Authority (APRA), and other members of the Council of Financial Regulators, “additional steps that might be taken to reinforce sound lending practices, particularly for lending to investors.”

The RBA said record low rates and intense competition among banks have fuelled growth in lending for investor housing to the point that it was “noticeably more so than for owner-occupier housing or businesses”.

“The composition of housing and mortgage markets is becoming unbalanced, with new lending to investors being out of proportion to rental housing’s share of the housing stock.”

After a few years of modest growth, housing credit accelerated to an annualised rate of around 7 percent in the six months to July, while growth in investor credit grew at nearly 10 percent, reaching its fastest pace since 2007.

There was a risk this speculative activity could push home prices up even faster and ultimately lead to a sharp reversal that could hurt consumer sentiment and spending more broadly.

“It will be important for banks’ own risk management and, in turn, financial stability that they do not respond to revenue pressures by loosening lending standards, or making ill considered moves into new markets or products.”

To be sure, the RBA said property investors have historically been at least as creditworthy as owner-occupiers, and mortgage lending standards remained firmer than in the years leading up to the global financial crisis.

Demand for commercial properties has also picked up strongly with the global chase for yield drawing both local and foreign investors alike, the RBA noted.

“This has boosted prices and widened the disparity between movements in prices and rents for both CBD office and industrial property,” it said.

“At this stage, however, the broader risks to financial stability from this source remain modest, because banks’ commercial property exposures are a smaller share of banks’ total assets than prior to the crisis.”

On the whole, the RBA said Australia’s financial system is being underpinned by the continued strong financial performance of the banking system.

Local banks have improved their resilience by increasing capital ratios and that their profitability remained robust, aided by further declines in band and doubtful debt charges, it added.

The RBA said Australia, as G20 chair for 2014, is working with the Financial Stability Board towards substantially completing key aspects of four core areas of reform. These include building resilient financial institutions, addressing the “too big to fail” problem, shadow banking risks and making derivatives markets safer.

“Progress appears largely on track to achieve, by the November G20 Leaders’ Summit, the key deliverables set out at the start of the year,” the RBA said.

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