Wednesday, September 24, 2014

RBA warns property investment is "unbalanced" and that speculation raises risk of price falls

The Reserve Bank has warned that investment in Australia property is becoming unbalanced and that speculation increases the potential for the current stellar prices to fall.

In its latest Financial Stability Review, the RBA says recent house price growth in Sydney and Melbourne has encouraged more lending and construction activity by investors.

But the central bank has signalled that the boom in rising prices could unravel if there is "a significant reassessment of risk" lead to a "sharp reprising of assets".

The RBA cites revised expectations for monetary policy - in other words, rate rises sooner than expected - that could derail investors overburdened with debt.

The RBA says "additional speculative demand" could amplify the property price cycle with a subsequent fall in prices hurting household wealth and spending.

"The apparent use of interest only loans for both owners and occupies and investors might also be consistent with increasingly speculative motives behind current housing demand."

And in a stark warning, the Review signals that the dynamics of a fall in asset prices would not only hurt those who fuelled to the speculation.

"The households most effected by the declines in wealth would not necessarily be those who contributed to the heightened activity."

While not directly suggesting the need for tighter lending standards through macroprudential regulation, the RBA said recent measures announced by the Australian Prudential Regulation Authority (APRA) "should promote stronger risk management by lenders".

The RBA says it is now discussing what it calls "additional steps" that might be taken to reinforce sound lending practices to property investors.

The Review has also raised concerns about Australia's commercial property sector which has also been the focus of strong demand from both domestic and foreign investors.

The RBA warns: "any significant reversal of demand could expose the market to a sharp repricing."

The RBA gives Australia's financial system a tick, saying it is underpinned by the strong performance of the banking system.

It says while some households have taken on more debt, lower interest rates for now allow them to service the debt load.

Follow Peter Ryan on Twitter @peter_f_ryan

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