March 26 (Bloomberg) -- The Reserve Bank of Australia said an upswing in property prices fueled by record-low interest rates can’t go on forever and lenders should avoid relaxing standards to boost profits.
“While rising housing prices and greater household borrowing are expected results from the monetary easing that has taken place and are helping to support residential building activity, they also have the potential to encourage speculative activity,” the RBA said in its semiannual financial stability review in Sydney. “It is important for both investors and owner-occupiers to understand that a cyclical upswing in housing prices when interest rates are low cannot continue indefinitely.”
The central bank lowered borrowing costs by 2.25 percentage points in an almost two-year easing cycle to a record-low 2.5 percent in August last year, seeking to boost industries like construction as mining investment ebbs. The reductions have fueled the property market, with prices in Sydney, the nation’s biggest city, jumping 14.1 percent in the year through Feb. 28.
The RBA noted today that the share of households favoring real estate as the best use of their savings has risen to a level approaching that of the early 2000s property market boom.
“More generally, the overall financial position of the household sector was little changed in 2013 and indicators of financial stress generally remain low,” the central bank said. “There are indications that some lenders are using less conservative serviceability assessments when determining the amount they will lend to selected borrowers.”
The Australian Prudential Regulation Authority will issue its expectations for prudent home loan practices, which should help banks stay vigilant in maintaining lending standards, the RBA said. Andrew McCutcheon, a Sydney-based spokesman for APRA, wouldn’t comment on when the guide would be released.
Commonwealth Bank of Australia, Westpac Banking Corp., Australia & New Zealand Banking Group Ltd. and National Australia Bank Ltd. -- named the four pillar lenders for a law that prevents them from buying each other -- reported A$14 billion combined profit for their latest six-month results, about 23 percent higher than the corresponding period a year earlier, the central bank said.
“With banks’ bad and doubtful debt charges now at relatively low levels, and in an environment of moderate credit growth, the sources of profit growth may be more limited in the period ahead,” the RBA said. “It will be important for financial stability that banks do not respond by unduly increasing their risk appetite or relaxing their lending standards.”
Australian households retain firepower for higher spending: The savings rate declined to 9.7 percent in the final three months of 2013, the first time it has dropped below 10 percent since 2010. It had fallen to a low of minus 0.1 percent in 2006.
Many households have used lower rates to accelerate repayment of their home loans. Mortgage buffers have risen to almost 15 percent of outstanding balances, which is equivalent to about 24 months of total scheduled repayments at current interest rates, the central bank said.
Australia’s household debt-to-income ratio stands at 147.9 percent, compared with a record 153.2 percent in 2006, RBA data show. The nation’s unemployment rate is at a more than 10-year high of 6 percent.
“Household gearing and indebtedness remain around historically high levels; hence, with the unemployment rate trending upwards, continued prudent borrowing and saving behavior is needed to underpin households’ financial resilience,” the central bank said.
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