SYDNEY, (Reuters) - Australia’s central bank warned on Friday the country’s housing market was a “key source of potential systemic risk” even as tentative signs of a turnaround in the property sector emerge.
In its 72-page Financial Stability Review, the Reserve Bank of Australia (RBA) said a succession of interest rate cuts and some easing of lending rules may have helped rekindle demand for the country’s housing market.
Australia’s A$1.95 trillion ($1.3 trillion) economy has grown for 28 years without a recession, but risks have intensified in the past year, with growth slowing, inflation lukewarm, the property market subdued and unemployment ticking higher.
Back-to-back rate cuts in June and July saw capital city house price declines slow, although other parts of the economy including approvals to build new homes remain subdued.
The RBA cut rates for the third time this year on Tuesday and financial market pricing implies a 50-50 chance of a fourth move as soon as next month.
The RBA is concerned about the housing sector as it accounts for 40% to 50% of household and bank assets.
“In the near term, risks from falls in housing prices have reduced but still exist,” the central bank said in its report on Friday.
“Increased uncertainty regarding the global and domestic macroeconomic outlook increases the risks faced by households,” it added.
“Overall, households remain well placed to service their debt: the most indebted households are those with the highest incomes, and many have sizeable prepayments.”
House prices in the biggest cities Sydney and Melbourne had picked up in recent months and the RBA said “there are tentative signs that turnover may be near its trough”.
However, home building activity was unlikely to revive soon. This week government data showed approvals to build new homes collapsed in September to the lowest since 2013.
Australia's household debt-to-income ratio is at a record high of about 190 percent, making mortgage holders vulnerable to higher interest rates or loss of employment.
The RBA said most households were comfortably making mortgage payments but a rise in non-performing housing loans - to the highest level since before the global financial crisis - was notable.
“Rising unemployment or ongoing weakness in income growth would likely see an increasing share of households struggle to make their debt repayments,” it said.
The central bank said uncertainty about the global economy had increased in the past six months as a result of the US-China trade war, while escalating tension in Hong Kong, the Middle East and Britain’s planned exit from the European Union may put further pressure on global growth.
While Australia was resilient to global economic shocks, an overly risk-averse approach by the country’s banks since a misconduct inquiry exposed widespread misconduct may add further downward pressure to the economy.
“It is important that banks are not overly cautious in the implementation of current lending policies,” the RBA said.
“Excessive risk aversion by financial institutions can curtail the provision of credit that facilitates economic growth.”