Tue. May 17th, 2022

The nationwide rise in house prices and expectations of even higher prices could lead to “excessive abundance” in the real estate market, Reserve Bank has warned, while signaling more restrictions on lending.

In a biannual review of financial sector stability, the RBA said that although high house price growth — which has reached 20 percent over the past 12 months — had improved the resilience of existing mortgagees, it had also increased systemic risks associated with rising debt.

The RBA has warned that

The RBA has warned that “excessive excess” in the real estate market can be handled through tighter lending standards.Credit:Peter Rae

This week, the Australian Prudential Regulation Authority (APRA) announced that banks will be forced to use more cautious interest rate assumptions when assessing new customers. The change is expected to reduce new customers’ borrowing capacity by approximately 5 per cent.

This follows a growing concern over price increases due to record low interest rates, government support programs and the closure of the international border. The median house value in Sydney has reached $ 1.3 million, while in Melbourne it is now $ 962,000.

The bank said the price increase had given a huge economic boost to people who already had a home but the market could take its own life if potential buyers took on even more debt to buy a property.

“Strong price growth and extrapolative price expectations can lead to excessive exaggeration in the housing markets,” it states.

“There has been a build-up of systemic risks associated with high and rising household debt. Vulnerabilities can build further if the strength of the housing market leaves room for flooding with expectations of further price increases that cause borrowers to take on greater risk, and banks may be able to ease lending standards. ”

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Under the changes introduced by APRA, banks must test whether new customers could manage their repayments at an interest rate that is 3 percentage points higher than the actual interest rate on the loan. Until now, banks have added 2.5 percentage points – known as a “service child buffer” – to the loan interest rate when assessing a customer.

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