Australia's RBA voices confidence in tighter home loan standards

In a 58-page Financial Stability Review report, the Reserve Bank of Australia (RBA) noted that the composition of new mortgage finance remained skewed to investors, particularly in the large cities such as Sydney.

“Ongoing strong speculative demand would tend to amplify the run-up in housing prices and increase the risk that prices in at least some regions might fall significantly,” the RBA said in the semi-annual report.

Such an outcome would at first hit the economy broadly because of the effects on household wealth and spending.

“However, the further housing prices fall in that scenario, the greater the chance that lenders would incur losses on their housing loans,” it said.

The RBA also pointed to growing risks in the commercial property sector, noting that investor demand has been strong despite weakening leasing conditions.

“Particular caution around collateral valuations is warranted in the current environment of declining property yields,” it said.

The RBA shrugged off concerns that a surprise interest rate cut in February would fuel home prices, saying it could “at the margin” boost demand for housing further.

“In this environment of low interest rates and strong demand, it is important that lending standards do not decline,” it said.

The RBA said recent measures announced by both the financial and corporate regulators were designed to do just that.

“While it is too early to see the effects of these measures in overall housing lending activity, the authorities will be monitoring an array of information in the period ahead to help ensure that the current risk profile in the mortgage does not deteriorate,” the RBA said.

Outside of investor housing, the RBA said household finances were less cause for concern with credit growth remaining moderate.

It added that household stress was currently low, but could start to increase if labor market conditions weakened more than expected. Business finances, on the other hand, generally appeared to be in good shape.