Australia:Reserve Bank sounds warning on house prices
The Reserve Bank has issued a fresh warning about the rising risk of a significant fall in house prices if “speculative demand” fueled by cheap credit continues to drive the property market.
With investor buyers powering a house price boom in NSW especially, the central bank on Wednesday said the risks in residential and commercial real estate were rising, and this could have consequences for the broader economy if it continued.
It came as one of the country’s most senior business figures, ANZ Bank chairman David Gonski, said the central bank should “think twice” before cutting interest rates again because the economy was already being stimulated by the weak Australian dollar and low oil prices.
While RBA officials have previously rejected claims of a housing bubble, the comments show it remains concerned about the boom in house prices, especially in Sydney, which has been unleashed by record low interest rates.
The RBA’s latest Financial Stability Review reinforced its concerns about speculative buying by investors in the property market, which has continued in the opening months of 2015.
“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 RBA said.
It did not specify which areas would be at risk of price falls, but highlighted the investor-led price growth in Sydney.
It said the main consequences of such a fall would be to dampen economic conditions by prompting many homeowners to cut their spending.
“Importantly, a future fall in housing prices would reduce wealth and dampen spending for the broader household sector, particularly for those households with significant housing debt, not just for the investors who contributed to the upswing,” it said.
A key reason house prices have surged is the plunge in interest rates – and the RBA cut official rates to a record low of 2.25 per cent last month.With cheap credit also inflating share prices, Mr Gonski, said he was unconvinced the Reserve should cut interest rates again – something financial markets believe is likely.
“I have enormous respect for Glenn Stevens and the Reserve Bank board, and I am sure they will get it right. But I am not going to punt which way [they will move], except hoping that they will just think twice before they reduce,” Mr Gonski said at an Australian Financial Review lunch in Sydney.
Significantly, the RBA’s report also said that most households had low levels of financial stress, and it does not believe banks’ lending standards have deteriorated.
Yet the comments come as the RBA and other financial regulators have put banks on notice not to expand lending to housing investors faster than 10 per cent a year.
The RBA said it was too early to see the results of moves to rein in lending to investors by the Australian Prudential Regulation Authority, but it warned banks to maintain prudent standards and said it would be keeping a close eye on the market.
ANZ Bank’s co-head of Australian economics Felicity Emmett said it was clear the RBA was concerned about “imbalances” in the housing market, but these were unlikely to stop it reducing interest rates further in the coming months.
Outside of residential property, the central bank raised concerns about strong price growth in commercial property, saying there was a growing risk of a “large repricing and associated market dislocation” in the sector.
The central bank last month cut official interest rates to a new record low of 2.25 per cent, and it said this move was likely to added some fuel to the property market.
“At the margin, the recent decline in mortgage interest rates can be expected to boost demand for housing further, though it will also make it easier for existing borrowers to service their debts.”
Source (http://www.smh.com.au)