RBA Warns Hot Housing Market Could Leave Borrowers Burnt

The Reserve Bank of Australia has warned against soaring house prices as increased attempts are being made to deter the investor-led housing boom.

The RBA has warned that the risks to banks are increasing, and a correction in house prices will hit borrowers hard.

The RBA said increased investor demand could lead to the risk of too much construction and an eventual oversupply of housing. This is particularly likely to affect Melbourne.

“At this stage the main risk from this strong investor activity appears to be that the extra demand may exacerbate the housing price cycle and increase the potential for prices to fall later,” the RBA said.

The RBA said the rise in investor activity had probably priced some potential first-home buyers out of the market.

It said the willingness of some households to take on more debt, combined with slower wage growth, meant the debt-to-income ratio had increased in the past six months.

“While this ratio is still within its range of the past eight years at around 150 per cent, it is historically high and hence any further increases in household indebtedness would be taking place from an already high base,” it said.

The RBA said the risk is more likely to be to future household spending than to lenders’ balance sheets

However, the RBA said direct risks to banks will rise if current rates of growth in investor lending and housing prices persist, or increase further.

Banks are being warned to be cautious about their lending practices.

“It is important…that banks set their risk appetite and lending standards at least in line with current best practice, and take into account system-wide risks in property markets in their lending decisions,” it said.

The RBA said there is uncertainty about whether lending practices are “conservative enough” for the combination of low interest rates, strong housing price growth and higher household indebtedness than in past decades.

The RBA also confirmed its discussions with the Australian Prudential Regulation Authority and other members of the Council of Financial Regulators.

The RBA said it wants to explore “further steps that might be taken to reinforce sound lending practices, particularly for lending to investors”.

The RBA said the share of investor loans approved with loan-to-valuation ratios between 80 per cent and 90 per cent has risen, as has interest-only loans and average loan sizes.