RBA Warns of Risks in Commercial Property Market

Wednesday, September 9th, 2015
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Reserve Bank of Australia
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A senior Reserve Bank official is urging regulators not to ignore the boom, and the subsequent risks, in the commercial property market.

Dr Luci Ellis, the RBA’s financial stability head, says the property market is not just about household mortgages and that policymakers and risk managers need to pay attention to commercial property loans.

“It is these segments of lending that tend to grow in importance in the late stages of a boom, and to account for a disproportionate share of loan losses in a bust,” she told the AGSM Real Estate Symposium.

“And, if we are looking for surges in credit growth as precursors to painful downturns, we should bear in mind that, historically, these surges have been evident in business credit far more than in housing credit.”

Dr Ellis said it was understandable that there was a greater focus on the housing market, rather than the more complex and diverse commercial property market.

Commercial property can include warehouses, factories and others, not just offices and shops.

“It is easy to wrap your arms around the housing market, whereas there are these more subtle issues (in the commercial property market),” Dr Ellis said.

“We think it’s really important to keep watching that and understanding that. You’ve got to put appropriate weight on both of them. It’s not either or. You’ve got to look at both.”

Westpac general manager, risk analytics and insights, Sean Carmody said that while commercial property was an important investment, it was riskier.

“We still see, in our stress testing, that is where we tend to lose the most money. Where banks have always lost the most money is commercial property,” he said.

“Not withstanding that these are big portfolios with the banks, they do need to be resilient.

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