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Australia Must Uphold Loan Standards to Avoid Bubble, RBA Says

Reserve Bank of Australia headquarters in Sydney
The Reserve Bank of Australia headquarters in Sydney. Photographer: Gillianne Tedder/Bloomberg

Australian banks must maintain lending standards to prevent a surge in house prices that is being stoked by faster population growth from turning into a bubble, a central bank official said.

“It will be important for lenders to remain prudent in their standards,” Luci Ellis, head of financial stability at the Reserve Bank of Australia, said in Sydney today. “It will be equally important for prospective borrowers to have realistic expectations, and not to rely on a hoped-for capital gain in order to service their debts.”

Prices in Australia’s A$4 trillion ($3.5 trillion) property market, which accounts for around 60 percent of household assets, grew 20 percent in the 12 months through March, prompting some analysts to warn of a bubble. The gains, which Ellis said were driven by higher population growth and slower dwelling supply, are among reasons Governor Glenn Stevens has led Group of 20 policy makers in boosting borrowing costs.

“We do not have a credit-fueled speculative bubble on our hands,” Ellis told the 2010 Financial Review Residential Property Conference today. “It would not be desirable for the current situation to turn into one.”

“The nature of the demand shock Australia faces means that it would be helpful if more of that demand could be accommodated with extra homes for occupation, instead of by higher prices,” she said.

Dwelling prices climbed last year after the central bank slashed the benchmark interest rate to a half-century low of 3 percent and the government temporarily tripled grants to first-time buyers of newly built dwellings to A$21,000.

‘Quite Quickly’

“Housing prices have been rising quite quickly of late,” said Ellis. “A number of factors have been boosting housing demand, and supply has struggled to keep pace.”

Population growth is now “running noticeably faster than growth in the dwelling stock,” she said.

Foreign buyers of Australian bank bonds are increasingly concerned a bubble is developing in the nation’s property market, according to Fitch Ratings.

Offshore investors have been asking whether there’s “an asset bubble forming in the housing market,” John Miles, a senior director at Fitch, said at a conference organized by the ratings firm in Sydney today. “If the investors perceive there is, then that could be a problem.”

Since early October, Stevens has increased the benchmark rate by 150 basis points to 4.5 percent this month, moves that the central bank described in the minutes of its May 4 meeting released today as “prudent.”

‘Well Placed’

They also mean Australia’s monetary policy is “well placed for the present,” the minutes said. There are signs that the adjustments are “beginning to affect behavior” of consumers and home buyers, officials said.

Retail sales growth almost stagnated in the first quarter, and approvals for new home loans have fallen 16 percent in March from their peak late last year, recent reports show. Housing credit growth at 8.5 percent over the year through March “is not running away,” Ellis said.

“We have been carefully watching lending standards in the first-home buyer market,” she said today. “As far as the data allow us to tell, recent new loans to first-home buyers look quite like those made to previous cohorts of first-home buyers.

“Indeed, across the mortgage market as a whole, lending standards are a little tighter than they were a couple of years ago,” she said.

Unlike earlier periods of rising dwelling prices, during which credit conditions “played a bigger role” in boosting demand, “in the current episode, by contrast, more of the extra demand is likely taking the form of demand for more dwellings, precisely because of the extra population growth,” Ellis said.

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