The Reserve Bank has once again flagged its concerns about a build up in risks in the property market, but it says tighter lending standards and $18 billion of new equity capital raised by the nation’s largest lenders this year has made the system safer.
The RBA document released on Friday singled out property development in certain cities that will lead to oversupply of apartments and aggressive investment in commercial property by foreigners, even as tenancy rates are weak.
There are a “few tentative signs that sentiment may be turning” in Sydney and Melbourne’s housing markets, the RBA said, one of several signs “that the banking system was better placed to manage the risk environment” than it was a year ago.
“While the housing market remains a long way from oversupply nationwide, some geographic areas appear to be reaching that point, particularly the inner-city areas of Melbourne and Brisbane.”
The additional capital, which included $3.5 billion raised this week by Westpac, was “timely because banks are facing an environment of heightened risk in their portfolios,” the central bank said in its semi-annual review of threats to the financial system.
The RBA noted that the banks had raised much of the capital required by regulators through a range of measures such as equity issuance, dividend reinvestment plans and assets but also noted that “at this point the major banks have not cut their dividend payments”.
The big banks still have more work to do to meet new liquidity rules that will require them to issue longer term debt to match the profile of long-term home loans, it said.
“Despite the changes further lengthening of the banks’ maturity profiles is likely to be necessary,” to meet new regulatory requirements that come into effect in 2018.
The RBA also highlighted its angst that lending standards were weaker than they had initially thought after the Australian Prudential Regulation Authority found that lenders were more aggressive in their lending standards than they presented, prompting the prudential regulator to take action.
APRA’s speed limit on investor lending was also working, with a strong relative growth in owner occupied loans in NSW and Victoria as borrowers resubmit their applications in the face of higher investment property loan rates.
The RBA said the subsequent “permanent” tightening of standards was important because “nominal housing price growth might be slower on average and periods of absolute price declines to more common – now that the transition to a low inflation, higher-debt state has been completed”.
Risk in commercial property lending was once again highlighted by the RBA given its outsized role in previous financial crises.
“The divergence between commercial property valuations and rents has widened further, with strong local and foreign investor interest for new and existing office buildings”.
The RBA said banks had also become ‘increasingly weary of lending to property developers in markets that look oversupplied”.
“Speculative demand could lead to an excess increase in construction activity and future supply overhang,” the RBA said, identifying inner city Melbourne and Brisbane as particularly vulnerable.
Any downturn in apartment market conditions would weigh directly on developer’s equity in projects under way and would increase the risk of off-the-plan sales falling through, the RBA said.
The key, the RBA said, “was to make sure lending standards at both Australian and foreign owned banks does not weaken from here”
Bank lending to the resource sector had also increased rapidly in recent years, the RBA said, while miners have also headed to the capital markets to raise debt, which it said was a low but rising risk for the banks.
And the RBA is still pinning its hopes on a rise in US interest rates “in the period ahead”.
“Although investors appear to be more discerning about risk, search for yield behaviour continues to be supported by accommodative monetary policy and is evident in a range of asset markets where prices remain elevated,” it said.