Wednesday, March 25, 2015

Reserve Bank warns on Sydney property - don't bet the house on it

The latest health check on Australia's financial system should provide the stark wake up call for investors betting that real estate prices will always keep rising.

The Reserve Bank has a blunt message - don't put the house on it.

In a ramped up warning about stellar markets in Sydney and a lesser extent Melbourne, the RBA's twice yearly Financial Stability Review is cautioning that investor exuberance and high expectations could see more than just a few fingers burned.

The RBA is warning that price falls in real estate could hurt even those who decided it's too risky to bet on real estate as an investment that always reaps big capital gains.

The key message about a broader economic fallout should be ringing alarm bells for investors on interest only loans and banks that risk exposure if prices fall or unemployment spikes.

In other words - what goes up can and does often go down.

"Ongoing strong speculative demand would tend to amplify the run-up in housing prices and increase the risk that prices in at least some regions might fall significantly later on," the Review says.

"The consequences of such a downturn is prices are more likely to be macroeconomic in nature because the effects on household wealth and spending would be spread more broadly than just on recent property purchasers."

And while household debt is currently at low levels, borrowers stress "could start to increase if labour market conditions weaken further than currently envisaged."

That's a real risk given that the official jobless rate is expected to peak around 6.75 percent later this year.

The RBA notes that the recent decline in the cash rate to 2.25 percent is likely to boost demand by borrowers and that given the low rates environment "it is important that lending standards do not decline."

In addition to residential real estate investment, the RBA has also flagged that risks appear to be building in the commercial property sector and that "particular caution around collateral valuations is warranted in the current environment of declining property yields."

Today's financial stability update ramps up a warning in the September review that property is becoming "unbalanced" and that speculation increases the potential for prices to fall.