Tuesday, March 17, 2015

Reserve Bank sounds alarm about commercial property sector

The Reserve Bank is becoming concerned about a price bubble building in the commercial property market.

In the minutes from its board meeting a fortnight ago, the RBA sounded an alarm about steep price rises particularly in the hot Sydney real estate market.

"Risks had been beginning to building in commercial property markets, including developers of residential and non-residential property," members noted.

"Prices in several market segments had been rising, even as vacancy rates remained high and leasing conditions weakened."

The caution comes as market watchers ramp up warnings about dangerous asset price bubbles building in real estate around the world.

The RBA also remains concerned about the residential sector, particularly in Sydney and Melbourne, and that February's surprise interest rate cut to a historic low of 2.25 percent could fuel investor interest.

"At the margin, the recent decline in interest rates could boost the housing market, including prices," the minutes say.

However, the RBA said that recent measures announced by the APRA (Australian Prudential Regulation Authority) and ASIC (Australian Securities & Investments Commission) were designed to "temper housing market risks" faced by both households and lenders.

"Although these risks need to be placed in the context of the prevailing low levels of household stress."

The minutes also show that the decision on March 3 to keep the cash rate steady at 2.25 percent was a close call so the RBA could assess the impact of the surprise February reduction.

"Members saw benefit in allowing some time for the structure of interest rates and the economy to adjust to the earlier change," the minutes note.

"They also saw advantages in receiving more data to indicate whether or not the economy was on the previous forecast path."

The RBA board also signalled it is waiting on a decision by the US Federal Reserve on the direction of the Federal Funds rates which has been at between zero and 0.25 percent since the depths of the global financial crisis.

The board noted "the greater degree of uncertainty about the behaviour of borrowers and savers in a world of very low interest rates".

The minutes also confirm the RBA will not be relaxed until it sees the Australian dollar fall even further than last week's six year low of 75.7 US cents.

"Although the Australian dollar had depreciated, particularly against the US dollar, it remain above most estimates of its fundamental value."

The Reserve Bank board holds its next meeting on Tuesday (date) and money markets see a 50 percent chance that rates will be cut to a new historic low of two percent.