Photographer: Patrick Hamilton/Bloomberg

RBA Sees Signs Home Market Slowing, Oversupply in Some Areas

Updated on
  • Home lending standards were weaker, since been tightened
  • Risks have grown in bank lending to property developers

Australia’s over-heated housing market could be starting to slow while rapid home construction in some areas is creating an oversupply, the central bank said in its semiannual assessment of risks to the country’s financial system.

“There have been tentative signs of some slowing in the Sydney and Melbourne housing markets,” the Reserve Bank of Australia said Friday in its financial stability review. “While the housing market remains a long way from oversupply nationwide, some geographic areas appear to be reaching that point, particularly the inner-city areas of Melbourne and Brisbane.”

Risks to Australia’s financial stability continue to revolve around property markets, with those surrounding housing and mortgage markets higher than average, the central bank said. Risks to the country’s banks have increased in the past six months, particularly in the area of commercial lending to property developers, it said.

“At the margin they’re becoming a bit more comfortable with the balance in the housing markets in Australia and mortgage lending but they’re very careful to say that it’s early days,” said Justin Fabo, a senior economist at Australia & New Zealand Banking Group Ltd. The RBA is saying that “if the tentative signs they’re seeing of some slowing and rebalancing continues, then that’s a good thing.”

Lending Standards

The central bank cut its benchmark interest rate to a record-low 2 percent in May to revive an economy struggling with a transition from a waning mining boom. The low rates further spurred demand in the country’s housing market and regulators have been forced to clamp down on banks’ loans to landlords while ensuring lending standards are maintained.

The RBA said that there are signs that these measures are starting to have an effect.

“Lending standards appear to have been somewhat weaker around the turn of this year than had been apparent at the time,” it said. “Standards have since been tightened.”

After last year calling the housing market imbalanced, the Australian Prudential Regulation Authority in December urged lenders to limit investor home-loan growth to 10 percent a year and in July it said the largest banks would need to increase the capital they need to hold against potential losses on mortgages from July 2016.

Investor Mortgages

Growth in Australian mortgages to landlords slowed to the weakest in almost three years in August. The value of mortgages to investors fell 0.4 percent from July and grew 12 percent from the previous year, the slowest annual expansion since December 2012, according to data released Oct. 9 by the Australian Bureau of Statistics.

There are early signs of a “better risk profile in the housing market,” the RBA said.

Bank Competition

Still, competition among banks to provide mortgages to owner occupiers in Australia remains strong, the RBA said, and a key challenge will be ensuring lending standards don’t weaken amid low interest rates.

Home prices across Australia’s capital cities have climbed 28 percent in the three years to Sept. 30 with Sydney prices jumping 44 percent, according to CoreLogic Inc.

Australian home prices are expected to fall 7.5 percent by the end of 2017 amid increasing supply and weak population growth, Macquarie Group Ltd. said in a note to investors Oct. 9, while Bank of America Merrill Lynch sees values dropping by as much as 6 percent in the same timeframe.

The RBA noted that building approvals for new apartments have been strong in 2015 even though rental markets already look soft in some areas. The projected growth in the number of foreign students studying in Australia -- a source of demand for rented apartments -- has been revised down.

Banks “are becoming increasingly wary of lending to property developers in markets that look oversupplied,” it said.

The central bank reiterated its concern from six months ago about rising commercial property values, which have diverged further from rents. There is “strong local and foreign investor interest for new and existing office buildings in particular, even though vacancy rates are quite high,” it said.

The RBA is also watching New Zealand’s deteriorating dairy sector due to low global milk prices, given the size of exposures of Australian banks’ subsidiaries there.

“These risks appear to be comfortably manageable at this stage but they underscore the need to maintain sound lending standards and the resilience of the financial and non-financial sectors,” the RBA said.