Reserve Bank warns market about major downturn

Reserve Bank warns market about major downturn

26 March 2015 by Nick Bendel 6 comments

Buyers have been warned that a surge in investment activity could trigger a jump in speculative behaviour and ultimately a “significant” fall in prices.

The Reserve Bank of Australia used its half-yearly Financial Stability Review to warn about the potential consequences of the “robust” growth in investor lending, especially in Sydney.

“Heightened investor demand can amplify the housing price cycle, especially when it involves the use of leverage, and so increases the risk that prices later fall significantly,” the Reserve Bank said.

“Investors are more likely to engage in speculative behaviour than are owner-occupiers, and they face lower barriers to exiting when the market turns down.”

Investor housing loan approvals in NSW have increased by almost 150 per cent over the past three years and now represent almost half of mortgage approvals, the Reserve Bank said.

This has helped generate rapid housing price growth in Sydney.

The Reserve Bank said that rising prices can trigger additional demand by making people assume further price growth is coming – although it added that expectations of price growth seem to be below the high levels reached in late 2013.

“Another risk arising from robust investor activity is that speculative demand could lead to an excessive increase in construction activity and future supply overhang,” it said.

There seems little prospect of a national housing oversupply, according to the Reserve Bank, but there is a risk of an apartment oversupply in the inner cities of Melbourne and Brisbane.

The Reserve Bank also said repeat-buyer owner-occupier demand had picked up slightly in recent months, especially in NSW and Victoria.

“In contrast, first home buyer owner-occupiers remain a low and declining share of the mortgage market, partly due to the winding back of government incentives for first home buyers in the established dwellings market over the past two years or so,” it said.

Despite the potential dangers posed by investor activity, the Reserve Bank said that Australian households were in reasonable shape.

Household credit growth has remained moderate because borrowers are taking advantage of record low interest rates to pay down debt ahead of schedule, according to the Reserve Bank.

There are also few signs that banks are lowering lending standards to win more business.

[Related: Authorities keeping watch on home loan risks]

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