By Wayne Cole
SYDNEY (Reuters) -Australia's central bank on Friday warned that "exuberance" in a red-hot housing market was encouraging a build-up of debt that might destabilise the financial system, urging banks to maintain lending discipline amid the boom.
In its semi-annual Financial Stability Review, the Reserve Bank of Australia (RBA) said the banking system was generally sound and well capitalised, but a debt-fuelled surge in house prices needed to be watched.
"Higher prices have improved the financial resilience of existing indebted borrowers," the RBA said in its 68-page update. "However, there has been a build-up of systemic risks associated with high and rising household indebtedness."
"Vulnerabilities could build further if housing market strength gives way to exuberance," it added.
To address this threat the Australian Prudential (NYSE:PUK) Regulation Authority (APRA) this week announced a tightening of home loan rules to ensure borrowers could afford to cover their loans.
The country's main banking watchdog had become concerned that home loan growth was far outstripping growth in incomes, with over a fifth of new loans approved in the June quarter accounting for more than six times the borrower's income.
All this borrowing has seen home prices rise 20% in the past year, even with coronavirus lockdown measures in major cities hitting jobs and hampering sales.
Median home prices in Sydney alone climbed A$196,000 in the year to September, or A$5,568 a day.
The Reserve Bank of Australia (RBA) has dismissed calls to raise interest rates, currently at a record low of 0.1%, to cool the market, arguing that would only cost jobs and harm the economy.
Indeed, the RBA still believes a rate hike is unlikely until 2024, a green light for leveraged investment in property.
Given that outlook, APRA's move on loan serviceability alone was unlikely to deter buyers.
"To be clear, the policy change will result in some future applicants borrowing less money than they would have otherwise," said Gareth Aird, CBA's head of Australian economics.
"But our initial assessment is that current momentum in the housing market is sufficiently strong that the overall impact on dwelling price growth next year will be modest."
He is tipping home price growth of 7% in 2022, unless APRA takes further, stricter steps.
Analysts suspect regulators might ultimately resort to debt to income limits on loans, likely at six times income.