Reserve Bank sounds warning on house prices

March 25, 2015 -

The Reserve Bank has warned there is a rising risk of a significant fall in house prices if "speculative demand" fuelled by cheap credit continues to pump up property prices.

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.

The RBA said new lending to property investors in NSW had surged by almost 150 per cent in the past three years Photo: Wolter Peeters, Wolter Peeters WLP

It also reaffirmed warnings for banks to maintain sound lending standards, as regulators seek to rein in higher risk lending to investor borrowers.

The RBA's 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 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.

The RBA is concerned that investor buying - which has been especially strong in Sydney - tends to be more speculative in nature, and rising house prices can lead to expectations of even more rises.

It also warned that risks appeared to be building in the commercial property market, despite falling rental yields and signs of a looming oversupply of buildings in some cities. A rise in interest-only lending was also a concern because these tended to be higher risk loans, it said.

A further risk created by "robust" buying from investors was that it could lead to too much housing construction and a future supply glut - though it said this did not appear likely at the national level.

Significantly, the 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, a pace that was eclipsed in latest official figures, with investor credit growing at about 10.5 per cent.

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.

"While it is too early to see the effects of these measures in overall housing lending activity, the authorities will be monitoring an array of information in the period ahead to help ensure that the current risk profile in the mortgage market does not deteriorate," the RBA said.

The 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."

In NSW, the RBA said new lending to property investors had surged by almost 150 per cent in the past three years, while investor lending had also grown strongly in Victoria.