House price bubble to burst
By Sid Marris
August 12, 2003
THE boom in housing prices was no longer sustainable, and the surge in lending that had helped fuel it might leave financial institutions vulnerable to the “inevitable” collapse in prices, the Reserve Bank warned yesterday.
Auction
Market: still on the boil
The bank’s latest quarterly statement on policy sketched an improving outlook for the world economy, and signalled it no longer assumes the next move in interest rates will be down.
Market economists predicted yesterday that as a result of the statement rates will remain on hold – an official rate of 4.75 per cent or a standard variable home loan rate of 6.58 per cent – for the rest of 2003.
But in its most serious comments on the runaway growth in lending, the central bank says it is worried about damage to both financial institutions and borrowers from the current lending spree.
“The longer the rapid increase in household borrowing continues, the greater is the risk that at some point households will need to adjust the structure of their balance sheets with potentially adverse consequences for the economy and financial institutions,” it says.
The growth in credit trend was confirmed yesterday, with the Australian Bureau of Statistics revealing an 8 per cent rise in lending for investment in June.
Overall lending for mortgages is growing at more than 20 per cent a year, while housing prices have grown between 20 and 25 per cent. The bank conceded that the growth of credit was standing in the way of a rate cut, despite signs of a slowing in economic growth in the second half of 2003 before a likely recovery in 2004.
Major banks have assured the Reserve that they are well prepared for any drop in housing prices. But the bank is worried about non-bank lenders and mortgage brokers that sometimes lend more than the initial value of a property.
The bank has taken aim at all lenders over aggressive borrowing to fuel consumption, known as equity lending, where households borrow against the assumed improved value of their home.
The already crowded market got bigger yesterday when American Express announced it had joined AMP to offer discount home loans.
Australian Consumers Association governing council chairman Chris Field said the Reserve was right to warn about aggressive offers of credit when people were already carrying record household debt.
He warned that if it did not ease soon, the trend would lead to a greater bankruptcy rate.
The bank’s statement says there were early signs the global economy, particularly that of the US, was improving, removing the greatest threat to Australia’s prosperity.
Governor Ian Macfarlane indicated in June that rates could fall if the promised recovery failed to materialise.
Although the risk remained, it was becoming less likely, yesterday’s statement said.
But the bank warns against overplaying the “tentative” signs of improvement in the US.
As traders concluded that rates cuts were no longer likely, the bond market weakened but the Australian dollar traded slightly higher, reaching US65.47c during the day after closing at 65.30c on Friday.
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