Reserve Bank of Australia notes lower mortgage rates in stability review

Investing.com - Lower mortgage rates following a cut to the central bank's cash rate to a record low 2.25% in February are expected to boost housing demand further, the Reserve Bank of Australia said Wednesday in its biannual Financial Stability Review.

There was no strong language on housing-market risk in the review but it reiterated the need to monitor this to ensure existing risk in the mortgage market doesn't worsen.

"Indicators of household stress are currently at low levels but could start to increase if labor-market conditions weaken further than currently envisaged," the RBA said.

The Australian Prudential (LONDON:PRU) Regulation Authority announced measures in December to deal with emerging risks from the mortgage market - mainly related to investor housing loans. The effect of those are being reviewed. Another regulator, the Australian Securities and Investment Corp., is reviewing interest-only lending practices by banks.

It is too early to expect a material slowing in investor-loan approvals or credit growth in response to APRA's measures because of the pipeline of preapprovals already agreed before the measures were announced, the RBA said. But, it said regulators would see if additional steps are needed depending on the evolution of risk in the housing and mortgage markets.

Growth in investor housing loans nationally has continued recently to be about 10.5% in six-month-ended annualized terms, the RBA said.

Monitoring risk is important because low housing-loan rates and strong growth in investor housing credit have raised the macroeconomic risks arising from the housing market, the RBA said.

"For instance, speculative demand by investors may amplify the housing-price cycle and increase the potential for prices to fall later on. In addition, the rising share of interest-only loans may increase risks because these loans are not required to amortize for a period of time, sometimes five years or longer, leaving households with more debt than otherwise," the RBA
said.

Another risk from robust investor activity is that speculative demand may lead to an excessive increase in construction activity and future supply overhang, the RBA said. While there is little to suggest oversupply is likely at the national level some areas at the local level look more vulnerable, the RBA said.

It repeated there is risk of oversupply in inner-city Melbourne but this time added higher-density dwelling approvals in inner-city Brisbane as a source of risk.

Another new source of building risk is in the commercial-property sector as investor demand for both new and existing developments has been strong despite weakening leasing conditions, the RBA said.

In recent years, commercial-property conditions have softened significantly and there are now clear signs of an emerging oversupply in some markets," the RBA said.

Lenders should pay particular attention to collateral valuations and also be mindful of the collective effects of strong lending activity within particular market segments - even if individual borrowers appear to be of low risk, the RBA said.

Household-sector finances are less cause for concern, the RBA said.