Low interest rates are doing what they are meant to do – boost housing prices, a Reserve Bank official says.
The problem is they are not encouraging the building of new housing, the RBA’s head of financial stability Luci Ellis says.
“Part of the anticipated effect of monetary policy is to induce more construction activity,” she said on Thursday.
“Higher prices are the incentive to get that expansion, which is indeed happening. But it is worth noting that the vast bulk of that new borrowing is to purchase existing properties.”
In 2013/14 house prices grew more than 10 per cent nationally, and 15 per cent in Sydney, driven by a big rise in investor activity, mostly in existing homes.
The central bank is concerned that soaring house prices and rapidly growing investor activity could pose a risk to banking stability and to the economy.
Dr Ellis told a conference in Sydney that close to half of all new net housing finance is for investors rather than owner-occupiers.
“That share is noticeably higher than rental housing’s share of the housing stock, even allowing for a possible faster rate of churn in investor loans,” she said.
“Obviously, that can’t continue forever.”
Dr Ellis said that the RBA will continue to monitor housing market developments, including lending standards.
“Amongst other things, banks and other lenders need to consider the risks they are taking on, not just from individual loans, but from the collective effects of lending decisions on the system as a whole,” she said.
RBA governor Glenn Stevens in September raised the possibility of changing regulations to curb risky lending to property investors.
The central bank’s figures released last week show the amount Australians owe on their mortgages has increased by its fastest annual pace for three-and-a-half years.
But, Dr Ellis said, housing prices relative to incomes were still within the range seen over the past decade, albeit towards the top of that bracket.
“But, if you look beyond the national aggregates and averages, risks do seem to have been building in some parts of the housing market, specifically the investor segments of the Sydney and Melbourne markets,” she said.
The finance sector’s regulator, the Australian Prudential Regulation Authority (APRA), also had been keeping a close watch on lending standards, Dr Ellis said.
“As has already been described publicly, APRA is consulting with the Reserve Bank and with other members of the Council of Financial Regulators, about additional steps that could be taken to reinforce sound lending practices,” Dr Ellis said.
“In doing so, it will balance the advantages and disadvantages in the context of financial system stability, safety, and efficiency, and it will consider how those measures can best be targeted.”
The RBA hopes to have the tougher rules in place by the end of 2014.
By Jason Cadden