Reserve Bank warns house prices cannot keep rising forever
03-27-2014
Alarm sounded over the potential for 'speculative activity in Australia's housing market'
Martin Farrer
A home for sale in Brisbane's west. Photograph: Dan Peled/AAP
Australia’s central bank has warned that the house price boom cannot go on forever amid concerns that some lenders are writing more risky mortgages.
Sounding the alarm over potential “speculative activity in the housing market”, the Reserve Bank of Australia said on Wednesday that buyers should be careful not to have “unrealistic expectations” about future price growth.
“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, and they should therefore account for this in their purchasing decisions,” the bank said in its financial stability review.
House prices rose 10% in Australia’s capital cities in 2013, fuelling concerns that first-time buyers are being priced out of the market as investors step up competition for properties.
Noting that four out of 10 home loans are now taken out by investors, the RBA report said: “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.”
It warned that while lending standards have been “steady”, there were signs that some lenders were being “less conservative” about how much they lent to buyers.
The RBA said that Australia’s banking system continued to perform strongly but warned of potential risks emerging in the shadow banking system of the country’s biggest trading partner, China.
Lending in this sector has grown rapidly because of restrictions on lending and rates of interest in the conventional banking sector.
"Chinese savers, seeking higher yielding alternatives to deposits, invest in wealth management products, which have short maturities but are frequently used to fund long-term lending by trust companies," the RBA said in its financial stability review released on Wednesday.
"Because these products are often marketed through banks, many investors are under the impression that they are implicitly guaranteed, a view perhaps supported by recent instances when government pressure was reportedly exerted to find a buyer for trusts nearing default."
The RBA said if investors lose confidence in wealth management products, they may decide not to roll over their existing investments, causing a shortage of funds available for loans.
"Concerns of this nature are highlighted by the near default of a wealth management fund in January," the RBA said.
"The gradual liberalisation of deposit rates should assist in removing the incentive for investments in wealth management funds and help ensure that the returns on savings products better reflect their risks."