Tuesday, September 17, 2013

Reserve Bank warns on property price bubble, but says banking system "relatively sound"

By Business editor Peter Ryan

The Reserve Bank has joined a growing chorus of local and global authorities to signal that record low interest rates have the potential to fuel a property price bubble.

In the minutes from its September meeting, the central bank's Board mirrored last week's warning from the prudential regulator APRA (Australian Prudential Regulation Authority) for banks to be vigilant about their lending standards.

"In the current environment of low interest rates and slow credit growth, members agreed that it was especially important that banks maintained prudent lending standards," the minutes say.

According to the minutes, the RBA board was briefed on the recent intervention by the Reserve Bank of New Zealand which has introduced a stricter loan to value ratio (LVR) as it deals with signs of a property price bubble.

Earlier today, the International Monetary Fund also signalled that the current era of low inflation and low interest rates around the world had the potential to created a price bubble.

In calling for the wider use of macro-economic tools, the IMF said the access to cheap money "encourages households to borrow more and can make them more vulnerable to shocks."

However, the RBA appears confident that the Australian banking system remains in "a relatively sound position" and the "profitability remains strong compared with that seen in other advanced economies."

"Households continue to show prudence in managing their finances with higher levels of saving and a slower pace in credit growth for some time.

"The continued high rate of excess home loan repayments was consistent with low rates of financial stress among households with mortgages."

But the RBA appears less comfortable about the growing use of property in self managed superannuations funds which are gaining popularity in Australia.

"Property gearing in self-managed superannuation funds was one area identified where households could be starting to take some risk with their finances."

According to the minutes, the rising risk "would be closely monitored" by RBA staff.

The warning from the RBA, APRA and the IMF coincides with the fifth anniversary of the Lehman Brothers collapse which sparked the global financial crisis.

The seeds of the GFC can be found in weaker lending standards and creation of a subprime housing market which burst to spark America's worst housing crash since the Great Depression.

The RBA left the cash rate on hold at 2.5 per cent earlier this month, saying the current setting was "appropriate".

The RBA has cut the cash rate by 2.25 percentage points since November 2011 to breathe life into the economy and to tame the high Australian dollar which has fallen by 15 percent since April.

1 comment:

  1. After over two decades of neglect by all political parties in allowing the five billion an year taxpayer funded speculation of negative gearing to inflate the price of renting or buying a home for the majority of Australians to the benefit of a few, it is too late to do anything about the cost of housing rising to unaffordable levels; if interest rates start to rise as they are bound to in the near future, the sensible action of a caring government will be to enact legislation that prevents Australian families from loosing their homes at any low price and still be left with a cost burden that was caused by the politicians of Australia, every other country that looked at negative gearing shuddered away from it knowing the eventual damage negative gearing would cause. To all the supporters of negative gearing, it hasn’t worked, there is still a housing shortage, and getting worse because of Politian’s been too lazy to adopt a housing policy that benefits all Australians. All negative gearing has achieved is the inflation of wages to pay for a roof over our heads, a fortune in taxpayers money been spent on childcare so both parents can go to work to pay for a roof over their heads. Surely the politicians of Australia can for once do something for the greater good of Australian families and put their ideological rubbish on hold until they retire from politics and hopefully do us no more harm.


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