International concern on Australia's mortgage lending

by Calida Smylie08 May 2014
Paris-based OECD has rung alarm bells for Australia to keep close watch on rapid growth in house prices and mortgage lending, and urged the Reserve Bank of Australia to take a leaf out of New Zealand’s book.

The report, which was written with input from Australian treasury officials, downgraded Australia’s growth outlook in 2015 to “below average”.

Output is projected to increase by 2.6% this year and 2.9% in 2015, with a general pick-up in demand offsetting declining investment in the resource sector.

“Some economic slack will remain and the unemployment rate will not begin to edge down until the second half of 2015. As a result, there will be little inflation pressure, although rapid growth in house prices and mortgage lending requires continued close attention,” OECD said.

It urged the Reserve Bank of Australia and other regulators to consider New Zealand-style limits on what banks can lend to home buyers, and called for increased vigilance over the property market.

OECD also indicated interest rates would need to be hiked from early next year.

“Given near-term uncertainties in the rebalancing of the economy away from investment in the natural resource sector, heavy front loading of fiscal consolidation should be avoided. Against the backdrop of the projected recovery, monetary stimulus should start to be withdrawn in the first half of 2015.”

Global ratings agency Moody’s has also warned the appreciation of house prices at current rates could become a “credit negative” for Australian banks within a year.

“Australian house prices have been rising rapidly in recent quarters, raising concerns with regard to their sustainability and the possible negative impact on the quality of Australian banks' residential mortgage portfolios – as well as the stability of the financial sector more broadly,” Moody's vice president and senior credit officer Ilya Serov said.

While Moody’s said the 13% increase in Australian house prices over the past 12 months was “not yet a threat” to the credit profiles of Australian banks, it warned housing ­market conditions were “finely ­balanced” and risks to the outlook were on the downside.

However, Moody’s said the recent house price appreciation has not been fuelled by excessive credit growth or a broad-based loosening of lending standards.

The ratings agency was concerned a credit negative situation could be fuelled by an acceleration of house prices outside Sydney, and also if there was a move away from price-based competition towards competition on underwriting standards, which could expose the banks to risks associated with lower-quality mortgage products.

It also said it was watching stress levels in regional Australia as the economy moves away from resources sector investment-led growth, which could “raise the risk of localised downturns and adverse asset quality developments in less-diversified loan portfolios”. 

For now, Moody’s has maintained its ­“stable” outlook for the banking sector and each of the big four banks also have “stable” outlooks.

But should the sector outlook change to “negative”, individual bank’s ratings would be likely to follow and funding costs increase.


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  • by Old Broker 8/05/2014 10:22:10 AM

    My opinion on house prices and the activity is more out of demand than speculation. Borrowers are now buying in areas where they like to live and also in most instances stay for long period of time. Any real estate that is out of a major city centre or reliable transport links is exposed and areas that are limited job prospects has to be carefully considered and also LVR should be at most 80%.

  • by Time for change 8/05/2014 12:16:35 PM

    Comfortable & affordable Housing (like food, clothing & education) should be a basic right & not the priviledge it is becoming. It seems our economy is driven by making housing as expensive as possible so that the rich can get richer & keep the less fortunate well, in less fortune.

  • by John Broker 8/05/2014 1:45:32 PM

    This is the same Moody's that presided over and were complicit in the ratings mess that led to the demise of the US mortgage market, and the GFC.
    Along with Standard and Poor's these clowns should either be in jail or out of business.