SYDNEY, (Reuters) - - Australia's central bank highlighted vulnerabilities in the country’s skyrocketing property market on Thursday, warning regulators would consider further tightening lending rules to head off a debt-fueled bubble in home prices.
In its 50-page half-yearly Financial Stability Review the Reserve Bank of Australia (RBA) noted the explosion in some “riskier types of borrowing” such as interest-only loans, which are hugely favored by property speculators.
Australia has successfully used historically low borrowing costs to spark a boom in home building that has helped shepherd the economy through the dog days of a global mining downturn.
But the risk of a housing bubble and bust is a major reason the RBA has not cut rates from the current 1.5 percent after last easing in August.
“The concern is that investors are likely to contribute to the amplification of the cycles in borrowing and housing prices, generating additional risks to the future health of the economy,” the RBA said in a report where the word "vulnerable" cropped up repeatedly.
It was concerned a blistering run in home prices, particularly in Sydney and Melbourne, could create the expectation of a further jump in home values, enticing more buyers into the market and fuelling indebtedness.
Household debt has climbed to a stratospheric 180 percent of disposable income at a time when income growth has crawled at its slowest pace on record. The unemployment rate, at 5.9 percent, is at a 13-month peak while new jobs are heavily skewed towards part-time work.
“A highly indebted household sector is likely to be sensitive to declines in income and wealth and may respond by reducing consumption sharply,” the RBA added, while noting that low interest rates were supporting households’ ability to service their debt for now.
Average mortgage buffers, an indicator of how far ahead households are on repayments - were quite robust, yet one-third of borrowers had either no accrued buffer or less than one month’s repayments socked away.
Home prices in Sydney are rising at a sizzling 19 percent annually with Melbourne clocking 16 percent.
The feverish pace of price increases prompted the country’s banking watchdog to tighten lending rules last month, demanding banks limit new interest-only loans to 30 percent of total new mortgages.
Banks also had to limit investor credit to "comfortably remain below" a previously set cap of 10 percent annual growth.
The RBA is not alone in its apprehensions about the housing sector. On Tuesday, ratings agency Moody's Investor Service said Australia was the most vulnerable of four top-rated developed economies to any shocks stemming from a housing downturn due to its high household debt.
The RBA said the banking system was strong, with robust capital and liquidity positions to withstand any shock, adding that a range of policies that are being finalised by regulators will further strengthen their position.
Aside from the housing market, the RBA saw risks in a potential global trade war under U.S. President Donald Trump.
In addition, a number of elections due in Europe this year could raise the influence of “eurosceptic parties”, potentially undermining the resilience of European banks and sovereign debt markets.
The RBA also pointed to financial stability risks in China which has “very high levels” of debt and rapid lending growth from less regulated and more opaque parts of the financial system.