Wednesday, March 26, 2014

RBA warns banks not to fuel real estate speculation with weak lending standards

The Reserve Bank has again warned Australian banks not to fuel real estate speculation by weakening their lending standards.

In its latest Financial Stability Review, the central bank says "the pick-up in lending for houses would be unhelpful if it was a result of lenders materially relaxing their lending standards".

And in a direct message to the Big Four banks, the RBA says "it will be important for financial stability that banks do not respond by unduly increasing their risk."

The Reserve Bank's warning to banks follows similar concern from the banking regulator APRA (Australian Prudential Regulation Authority) about relaxed lending standards in the face of rising property prices in Sydney and Melbourne.

While the RBA does not refer to a property "bubble", it again warns investors about the risks of real estate investment and that low rates "have the potential to encourage speculative activity in the housing market."

The review echoes warnings made repeatedly by the Reserve Bank governor Glenn Stevens that real estate investment was not an assured path to easy capital gain.

"It is important for both investors and owner-occupiers to understand that a cyclical upswing in housing prices when interest rates are low cannot continue indefinitely," today's review said.

"And they should account for this in their purchasing decisions."

The RBA also says there are indications that some lenders are using less conservative assessments when determining the amount of money which can be lent.

The comments from the RBA saw the Australian dollar remain steady at around 91.6 US cents on speculation that the next move for the cash rate will be up from a record low of 2.5 percent.

Westpac's chief economist Bill Evans recently dropped his forecast of two more rate cuts this year and is now predicting a rate rise in 2015.

The Reserve Bank is also concerned that household debt is "still around historic highs" and that unemployment is trending upwards.

"Continued prudent borrowing and saving behaviour is needed to underpin the financial resilience of households," the RBA says in the review.

"The recent momentum in household risk appetite and borrowing behaviour, in particular, therefore warrants close observation."

The RBA gives the overall financial system a tick of approval and says indicators of financial stress remain generally low.

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