Economic risks from housing boom 'could be building' – RBA

The central bank says it's "continually assessing" whether macroprudential measures are needed to calm the booming market

Economic risks from housing boom 'could be building' – RBA

The Reserve Bank of Australia has warned that the risk “could be building” that excessive borrowing will drive an unstable rise in the housing market that could negatively impact the economy.

While the RBA said regulators were “continually assessing” whether to impose macroprudential measures to calm the booming market, the central bank stopped short of saying there was currently a need to impose those rules, according to a report by The Australian.

In a speech on the housing market and financial stability, RBA Assistant Governor Michelle Bullock said the past year’s housing boom was part of a “bridge” of economic support created by monetary and fiscal policies enacted in response to the COVID-19 pandemic.

“But with the increase in housing prices and housing debt, risks to financial stability could be building,” Bullock said. “Even though the banks have strong balance sheets and lending standards are being maintained, there is a risk that in this environment households will become increasingly indebted. A high level of debt could pose risks to the economy in the event of a shock to household incomes or a sharp decline in housing prices. It is these macrofinancial risks that warrant close watching.”

Bullock said that Australian banks are “very exposed” to the housing market, since around 60% of their loans are for housing, and homes are often used as collateral for small business loans. She said that if the economic outlook were to cause borrowers to be unable to service their debt at the same time there was a sharp drop in house prices, banks would see losses. If those losses were big enough, it could create a snowball effect if the banks then reduced their lending, The Australian reported.

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However, stress tests by the RBA last year showed that banks would still retain capital above the regulatory minimum even in the event of a severe recession and a substantial drop in property prices.

Bullock cautioned that “over-exuberance” in household borrowing could impact consumption. She said that rapid price increases can cause borrowers to “overstretch their financial capacity” in order to obtain a loan, making them more likely to cut their consumption. And if the rapid increase in house prices proves to be unsustainable, it could lead to a sharp drop in prices and turnover in the housing market, The Australian reported.

Bullock said that while investor activity in the market was “nowhere near the levels it was in 2014,” it was “hard to judge in real time” if home prices were out of line with fundamentals.

“Nevertheless, when prices are rising very rapidly and there are expectations that this will continue, borrowers are more likely to overstretch their financial capacity in order to purchase property,” Bullock said. “We are therefore watching developments in housing markets and credit very closely.”