RBA: Property Risks are not large enough to result in widespread problems in the Financial Sector

  • Mar 20, 2019 AEDT
  • Team Kalkine
RBA: Property Risks are not large enough to result in widespread problems in the Financial Sector

In the past few years, RBA has many times highlighted the issue of household debt which could create a potential threat to financial stability as the household debt-to-income ratio has increased significantly from around 70% at the beginning of the 1990s to around 160% at the time of the GFC. In the last decade, the housing prices in many regions of Australia have increased; however, in the recent past, the housing prices have declined sharply particularly in Sydney and Melbourne. The housing prices in Perth have declined in the last few years, with median housing prices falling by around 12% since 2014.

The high levels of debt and falling housing prices have created many risks for financial stability; however, as per RBA’s recent release these risks appear to be elevated but contained.

The impact of high levels of debt and falling housing prices is not large enough to result in widespread problems in the financial sector, said the Reserve Bank of Australia’s Assistant Governor Michele Bullock on 20 March 2019.

While providing information about Apartment Development in Australia, Ms. Bullock informed that there has been a substantial rise in apartment construction in the last decade. The recent decline in the apartment prices could create problems for households who might find themselves in a situation where the value of the apartment in the current environment is less than they contracted to pay for it.

Further, there is also a risk for developers as there is a possibility that they might be left holding completed apartment as people who had pre-purchased are facing difficulty in getting finance. As per Ms. Michele Bullock, the above-mentioned risks are appearing to be elevated but contained as settlement failures have not increased so much that the developers are in a position where they can choose to hold and rent unsold apartments.

Like housing, Commercial property valuations have increased substantially in the past decade. The increase in valuation is much higher as compared to rents due to which the yields on commercial property have declined to very low levels, particularly in case of office and industrial property. Although the yields have been historically low in Australia, the rapid increase in commercial property prices over the past decade is posing risks which could trigger property sales and further price falls, exacerbating the cycle.

Ms. Bullock also talked about tight lending standards which have played a major role in the downturn in credit and the housing market. The Lending standards have been tightening since late 2014, at that point of time they didn't have an immediate impact on the pace of investor lending. It didn't really start to bite until the middle of 2015 when banks introduced higher interest rates due to which growth in lending to investors slowed sharply.

Till now the Australian financial sector has remained resilient despite facing risks due to the level of household debt, the apartment development cycle and the level of non-residential commercial property valuations.


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