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High investor activity a risky sign: RBA

28 March 2014 Stefanie Garber

The Reserve Bank of Australia (RBA) has warned rising levels of investor activity must be “monitored closely” to prevent a risk to market stability.

In its most recent Financial Stability Review, the RBA said housing loan approvals to investors have picked up markedly in the past year.

Investors now make up 40 per cent of the value of total housing loan approvals in New South Wales and a similar share in Victoria.

While the RBA said current investment activity was not at dangerous levels, it resolved to monitor any changes in coming months.

“While the pick-up in investor activity in the housing market does not appear to pose near-term risks to financial stability, developments will continue to be monitored closely for signs of excessive speculation and riskier lending practices,” the report stated.

The review suggested frantic investment activity can lead to inflated expectations among investors, which may fuel risky or speculative behaviour.

“Stronger activity in the housing market, particularly by investors, can be a signal of speculative demand, which can exacerbate property price cycles and encourage unrealistic expectations of future housing price growth among property purchasers,” the report stated.

The RBA also said high levels of investment may lead to increased dwelling construction, which could push down prices if an oversupply develops.

However, the RBA stated a supply imbalance appears unlikely at this stage, even in hot markets like Sydney and Melbourne.

“While the recent pick-up in higher-density dwelling construction approvals in Sydney and Melbourne warrants some monitoring, the near-term risk of oversupply in those cities seems low,” the review stated.

The RBA said a number of factors have contributed to investors gaining greater dominance in the market, including low interest rates, changes to bank serviceability and the elimination of first home buyer incentives.

Aside from investors, the RBA also noted non-residents and SMSFs were providing additional demand for housing.

However, despite recent media focus on foreign investment, the RBA said these groups made up a limited share of total borrowings for property.

High investor activity a risky sign: RBA
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