(Transcript from SBS World News Radio)
The Reserve Bank of Australia says it's looking to encourage banks to lend less to property investors.
The central bank is worried investors are driving up prices and threatening the broader Australian economy.
Representatives of the bank have been called before a Senate committee to explain how they plan to respond to the risk.
Michael Kenny has this report by Thea Cowie.
(Click on the audio tab above to hear the full report)
Reserve Bank of Australia assistant governor Malcolm Edey says something needs to be done to rein in the booming housing market before it gets out of hand.
"National housing prices have been rising at a rate of about 10 per cent over the past year, and around 15 per cent in Sydney. The rate of growth of investor finance is significantly outpacing the growth in household incomes. Loans to investors currently account for close to 50 per cent of new housing loan approvals. Investor activity has been particularly concentrated in New South Wales and Victoria. In New South Wales investor loan approvals have increased by about 90 per cent over the past two years."
The bank's head of Financial Stability Luci Ellis says the concern is not about banking system instability, but household instability.
She's told the committee that when the investor-driven price boom inevitably ends, households could be caught out.
"In any given period there's always some households who experience unfortunate events - one of them might become sick or die or lose their job - and suddenly they're unable to manage their financial obligations. And so you can understand with that ground level of individual risk that's a much worse outcome if house prices should fall because suddenly you may find that instead of 'I can no longer manage the mortgage, I have to sell the house but at least I can sell the house but at least I'll walk away with some equity.' It's now a situation where they're in negative equity and they will actually default."
In such a scenario Dr Ellis says households would drastically rein in spending, which would have severe implications for the wider economy.
The Reserve Bank was called before the Affordable Housing Committee after Governor Glenn Stevens last week flagged measures to reduce the risk.
There has been speculation measures could include insisting on higher minimum deposits for property investors, tighter loan to valuation ratios for mortgages, or forcing banks to set aside a bigger cash buffer.
But Dr Ellis has told the committee limits are unlikely to be imposed.
"30 per cent of income might be quite a struggle for someone who's got a lot of obligations, but it might be really easy for someone who's got quite a high income who's willing to make the spending sacrifices in order to service that particular loan. So setting a ceiling on that doesn't really map into the right credit risk management for individuals and that's why Malcolm said that the kind of measures that APRA have in mind is really incentive-based. It's within its existing framework."
Assistant Governor Edey says any measures would be carefully, but not geographically, targeted.
He's told the committee the bank does not want to kill the investor market, but it wants to address the imbalance between investors and owner-occupiers.
For that reason he rejects suggestions that new measures would make it harder for first home buyers to enter the market.
"The sorts of measures that we're talking about - if anything - should be good for first home buyers because one of the complaints at the moment is that they're being priced out of the market by investors ramping up property values."
The Reserve Bank says it's ultimately up to the Australian Prudential Regulation Authority to decide what steps to take, but any announcement would likely be made before the end of the year.
Share
