The Reserve Bank knows it is fuelling cheap finance for home buyers, as property prices surge in cities and the regions, but is not worried about undue risk to financial stability.
To date the growth in asset prices has not been associated with a significant increase in the growth of debt, according to the RBA’s twice-yearly assessment of Australia’s financial system issued on Friday.
The central bank said housing price growth, and to a lesser extent housing borrowing, has picked up notably in recent months and is being “watched closely” by regulatory authorities.
But delays in widespread vaccination against COVID-19 amid a global shortage of doses, or concerns over the efficacy of available vaccines, are a crucial factor that could stall the economic recovery here and overseas.
The RBA warning comes as advice on the AstraZeneca jab destroys the Morrison government’s October rollout target, with the immunisation effort now unlikely to be completed until 2022.
Housing prices have been rising as low interest rates support demand, easing the RBA’s fears earlier in the pandemic that falling prices would result in distressed sales and significant losses on mortgage lending.
“In an environment of accommodative financial conditions with rising asset prices it is particularly important that there is not excessive risk-taking by the financial sector,” the central bank said.
Increased risk-taking by lenders could take the form of looser lending standards for individual loan assessments, or a relaxation of internal limits on the share of riskier loans they make.
“Even if lenders do not weaken their own settings, increased risk-taking by optimistic borrowers could see a deterioration in the average quality of new lending,” the bank said.
This would weaken the resilience of businesses and households, and so the financial system, to future shocks.
Bad loans are rising, across household and business categories, but the increase is expected to be “modest” despite the unwinding of loan payment deferrals and the end of wage subsidies.
“The Australian banks are in a strong financial position coming out of the pandemic,” the RBA said.
The Australian Prudential Regulation Authority’s recent stress test of banks found they could withstand a severe contraction in which GDP fell by 15 per cent, unemployment topped 13 per cent and national housing prices slumped by more than 30 per cent.
The RBA said these settings were much worse than its own downside scenarios.
Low interest rates can squeeze net interest margins but the financial stability review found lower rates are not having a meaningful impact on overall bank profitability.
In fact, bank profits are rebounding and are expected to strengthen further in 2021.
Banks also have “abundant liquidity and funding”.
The RBA cited improvement in residential lending standards dating to the mid-2010s as helping to ensure borrowers were well placed to weather the recession “demonstrating the benefits to the financial system and the economy of appropriately controlling risks”.
In its previous assessment, issued last October, the central bank warned of the risk of falling house prices because of reduced demand from very low immigration and rising unemployment.
Despite the red-hot housing market, RBA governor Philip Lowe reiterated earlier this week he has no intention of raising rates with inflation and employment targets still well out of reach.