Reserve Bank issues warning on property boom

The Reserve Bank has strengthened its warnings about the property frenzy in its Financial Stability Review published yesterday.

The review, which is released twice a year, warns an “unbalanced” housing property market may place the broader economy at risk and potentially threaten commercial property.

This goes further than previous warnings issued by the RBA.

The review warns the low interest rate environment and, more recently, strong price competition among lenders have translated into a strong pick-up in growth in lending for investor housing, noticeably more so than for owner-occupier housing or businesses.

“Recent housing price growth seems to have encouraged further investor activity. As a result, 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,” the review states.

The RBA includes a warning to banks not to loosen lending or property valuation standards or rush into new markets or products, and to make sure borrowers are able to service their debts in conditions significantly less benign than the low interest rate environment currently applying, or if unemployment grows significantly.

The RBA also flags the use of macro prudential tools in the review.

It reveals the RBA is working with the Australian Prudential Regulatory Authority to explore ways of tightening rules “to reinforce sound lending practices, particularly for lending to investors.”

Despite the warning, Harley Dale, chief economist for the Housing Industry Association, told SmartCompany there is no real need for concern at this point in time. 

“The RBA is saying if this situation continues unabated you could have a situation where parts of the Sydney and Melbourne market are getting a little out of hand,” he says.

But Dale points to investor credit growth which is running at only a third of the pace it was running at back in the last boom in 2001 and 2002. 

“The key here is that there is a certain element of uncertainty that isn’t good for investors,” he says.

Dale says the element of uncertainty revolves around whether the RBA is going to impose some sort of targeted lending restrictions or through APRA there will be some behind the scenes tightening of lending standards “which by all accounts is happening anyway,” he says.   

“But if you were to find a situation where some kind of macro prudential tools were explicitly employed because there was a need to reduce lending then that would have an adverse confidence, which would not be positive for the investment community.”