The Reserve Bank has claimed the Australian housing and mortgage market is becoming “unbalanced” due to investor demand being out of proportion to rental demand.
In its latest half-yearly Financial Stability Review, the Central Bank says the low interest rate environment coupled with strong house price growth – particularly in Sydney and Melbourne – is the reason behind the surging popularity in property investment.
But with investor lending growing noticeably more so than lending for owner-occupiers or businesses, the Bank is concerned about the risks this “unbalance” may have on the economy – as they worry investors may be buying up property in the hope of capital gains over rental income.
“…a broader risk remains that additional speculative demand can amplify the property price cycle and increase the potential for prices to fall later, with associated effects on household wealth and spending,” the RBA
According to the Review, investor housing loan approvals currently account for almost 40% of the value of total loan approvals.
If increased speculative investor demand causes house prices to plummet later, the RBA says the effects on households could be widespread.
“These dynamics can affect households more widely than just those that are currently taking out loans: the households most affected by the declines in wealth need not necessarily be those that contributed to heightened activity.”
The Bank also raised concern over the risks to financial institutions if the high rates of lending growth persists, highlighting the argument for reviewing – and possibly raising – the current lending standards.
“In this environment, recent measures announced by the Australian Prudential Regulation Authority
(APRA) should promote stronger risk management practices by lenders. The Bank is discussing with APRA, and other members of the Council of Financial Regulators, additional steps that might be taken to reinforce sound lending practices, particularly for lending to investors,” the RBA said.
The Reserve Bank also has its eye on the rise of interest-only loans, which are popular amongst investors. Due to the tax advantages on these types of loans, interest-only loans account for around 64% of loan approvals to investors, according to the Review. However, there are some risks.
“If the loan balance is not declining via principal repayment, it is more likely that it will exceed the property value (be in negative equity) if housing prices should fall. There is also a risk that the borrower could face difficulty servicing the higher (principal and interest) repayments after the interest-only period ends,” the RBA said.