RBA Intensifies Alert on Aussie Household Debt, Property Market

  • Investors could amplify housing cycles, posing future problem
  • Shadow banking sector in China poses ‘significant risks’

Australia’s central bank signaled deeper concern amid “heightened risks” from rising household debt and escalating property prices in Sydney and Melbourne.

The Reserve Bank of Australia, in its semiannual Financial Stability Review Thursday, said interest-only loans are rising and now account for almost a quarter of owner-occupier mortgages. It also noted about one-third of mortgage holders have either no buffer or less than one month’s repayments.

“In Australia, vulnerabilities related to household debt and the housing market more generally have increased,” the central bank said. “Some riskier types of borrowing, such as interest-only lending, remain prevalent.”

Australia’s banking regulator tightened lending restrictions last month as concern mounts that runaway home-price growth may stoke a housing bubble. The RBA said Thursday the risks from rising debt and property prices is “primarily macroeconomic in nature,” rather than to the stability of the nation’s financial institutions.

“The concern is that investors are likely to contribute to the amplification of the cycles in borrowing and housing prices, generating additional risks to the future health of the economy,” the central bank said.

“While it is not possible to know what level of overall household indebtedness is sustainable, a highly indebted household sector is likely to be more sensitive to declines in income and wealth and may respond by reducing consumption sharply,” it said.

‘Strong Scrutiny’

Under regulators’ latest curbs, home lenders will have to restrict interest-only loans to 30 percent of total new residential mortgages. Lenders will also have to place “strict” limits on the number of interest only-loans of more than 80 percent of a property’s value, and ensure “strong scrutiny and justification” of any interest-only loans of more than 90 percent of a home’s value, the Australian Prudential Regulation Authority said.

“The RBA will watch and wait to assess the latest tightening measures announced by APRA before making any judgement on the outlook for monetary policy,” said Paul Brennan, chief economist at Citigroup Inc. in Sydney. “It also is likely APRA will announce further prudential measures later this year, including on capital and high LVR lending.”

The RBA did note that indicators of household stress “remain contained” as a record-low cash rate of 1.5 percent supports households’ ability to service debt and build repayment buffers. Aggregate mortgage buffers are about 17 percent of outstanding loan balances, or around 2-1/2 years of scheduled repayments at current interest rates, it said.

Turning to Australia’s key trading partner, China, the central bank warned financial stability risks in the world’s second largest economy “remain elevated.” It said shadow banking in China continued to pose “significant risks.”

The RBA said in the event “financial distress” emerged in China, Australia and other economies would likely be affected through the impact on the Chinese economy and “the resultant lower trade volumes and commodity prices, as well as through weaker confidence and higher volatility in financial markets.”

Apartment Glut

In its October stability review, the RBA expressed concern about an apartment glut in parts of Melbourne and Brisbane. It noted in the latest review that prices had fallen in Brisbane and conditions were challenging in Perth, the Western Australia capital that was at the epicenter of the mining boom.

The RBA added that banks’ direct exposures to the mining sector had declined in recent years and were now a little over 1 percent of their total lending.

The central bank cites liaison as saying settlement failures remain low. One reason for delays in settlements is tighter access to finance, particularly for buyers relying on foreign income. It also indicated valuations at settlement are sometimes coming in below what buyers had anticipated and in some cases, below contract purchase prices.

But it was debt and house prices that were the overwhelming message in Thursday’s report.

“Lenders’ practices in assessing the ability of borrowers to repay their loans are important to manage the systemic risks posed by interest-only lending,” the RBA said.

— With assistance by Emily Cadman

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