Australia's central bank intensifies alert on rising household debt, escalating property prices

Australia's banking regulator tightened lending restrictions last month as concern mounts that runaway home-price growth may stoke a housing bubble.
Australia's banking regulator tightened lending restrictions last month as concern mounts that runaway home-price growth may stoke a housing bubble. PHOTO: REUTERS

SYDNEY (BLOOMBERG) - Australia's central bank signaled deeper concern amid "heightened risks" from rising household debt and escalating property prices in Sydney and Melbourne.

The Reserve Bank of Australia, in its semiannual Financial Stability Review on Thursday (April 13), said interest-only loans are rising and now account for almost a quarter of owner-occupier mortgages. It also noted about one-third of mortgage holders have either no buffer or less than one month's repayments.

"In Australia, vulnerabilities related to household debt and the housing market more generally have increased," the central bank said. "Some riskier types of borrowing, such as interest-only lending, remain prevalent."

Australia's banking regulator tightened lending restrictions last month as concern mounts that runaway home-price growth may stoke a housing bubble. The RBA said the risks from rising debt and property prices is "primarily macroeconomic in nature," rather than to the stability of the nation's financial institutions.

"The concern is that investors are likely to contribute to the amplification of the cycles in borrowing and housing prices, generating additional risks to the future health of the economy," the central bank said.

"While it is not possible to know what level of overall household indebtedness is sustainable, a highly indebted household sector is likely to be more sensitive to declines in income and wealth and may respond by reducing consumption sharply," it said.

Under regulators' latest curbs, home lenders will have to restrict interest-only loans to 30 per cent of total new residential mortgages. Lenders will also have to place "strict" limits on the number of interest only-loans of more than 80 percent of a property's value, and ensure "strong scrutiny and justification" of any interest-only loans of more than 90 percent of a home's value, the banking regulator said.

The RBA did note that indicators of household stress "remain contained" as a record-low cash rate of 1.5 per cent supports households' ability to service debt and build repayment buffers. Aggregate mortgage buffers are about 17 per cent of outstanding loan balances, or around 2-1/2 years of scheduled repayments at current interest rates, it said.

Turning to Australia's key trading partner, China, the central bank warned financial stability risks in the world's second largest economy "remain elevated." It said shadow banking in China continued to pose "significant risks."

The RBA said in the event "financial distress" emerged in China, Australia and other economies would likely be affected through the impact on the Chinese economy and "the resultant lower trade volumes and commodity prices, as well as through weaker confidence and higher volatility in financial markets."

In its October stability review, the RBA expressed concern about an apartment glut in parts of Melbourne and Brisbane. It noted in the latest review that prices had fallen in Brisbane and conditions were challenging in Perth, capital of Western Australia that was at the epicenter of the mining boom.

The RBA said banks' direct exposures to the mining sector had declined in recent years and were now a little over 1 per cent of their total lending.

The central bank cites liaison as saying settlement failures remain low. One reason for delays in settlements is tighter access to finance, particularly for buyers relying on foreign income. It also indicated valuations at settlement are sometimes coming in below what buyers had anticipated and in some cases, below contract purchase prices.

But it was debt and house prices that were the overwhelming message in today's report.

"Lenders' practices in assessing the ability of borrowers to repay their loans are important to manage the systemic risks posed by interest-only lending," the RBA said.