Reserve Bank warns of more boom and more debt

Reserve Bank warns of more boom and more debt

10 August 2015 by Nick Bendel 0 comments

Australia’s central bank has raised the extraordinary possibility that property prices in Sydney and Melbourne have not yet responded fully to ultra-low rates.

The Reserve Bank of Australia used its quarterly statement on monetary policy to note that it might be too early to call time on the boom in Australia’s two biggest cities.

“Supply constraints, particularly in Sydney, may limit the extent to which new dwelling investment can satisfy growing demand, which raises the possibility that housing prices will grow more quickly than forecast,” it said.

“Also, housing prices outside Sydney and Melbourne are little changed over the past year or so and may not yet have responded fully to the very low levels of interest rates.”

Annual house price growth has recently accelerated in those markets, with Sydney at 19.8 per cent in July and Melbourne at 12.3 per cent, according to CoreLogic RP Data.

That came after a NAB Group Economics forecast from June predicted Sydney would grow 5.0 per cent in 2016 and Melbourne would grow 3.5 per cent.

The Reserve Bank also used its statement to warn of a rise in household debt and the impact this could have on the financial system.

Debt-to-income ratios have moderately increased in recent years and are likely to continue doing so, albeit gradually and from relatively moderate levels, according to the statement.

The Reserve Bank said it is working to assess and contain risks that may arise from the housing market, with household debt one potential threat to financial stability.

This was a theme the Reserve Bank also covered last week in its statement to the Federal Inquiry into Home Ownership.

Financial Stability Department head Luci Ellis said that while housing loans have generally been less risky than other loans, they need to be monitored given the size of the sector.

“Recent history from around the world also shows that although households' mortgage borrowings typically do not instigate financial crises and distress, they can do so if the institutional arrangements and lending standards are configured to allow it,” she said.

“Australia is a long way from that situation and we want to ensure that remains true. More broadly, we want to promote financial stability by making sure that Australians are generally resilient to the financial shocks that might come their way.”

[Related: ‘The likelihood of an outright house price correction is rising’]

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