Australia's central bank warns of excessive lending risk as house prices surge

Reuters has reported that Australia’s banks are in a strong financial position coming out of the coronavirus pandemic although record low interest rates and rising house prices create a risk of excessive borrowing,.

This is according to the Reserve Bank of Australia which conducted its biannual review on Friday.

''House prices in Australia have been surging in recent months with values in Sydney and Melbourne at record highs led by demand from first-home buyers.''

''While the red-hot market has regulators worried about excessive risk-taking by lenders, the Reserve Bank of Australia (RBA) has repeatedly said it would not respond by raising interest rates from 0.1%, pointing instead to possible macro-prudential tightening.''

''In its 59-page Financial Stability Review, the RBA said that regulators were closely monitoring the recent house price surge, though as yet bank lending standards were “robust.”''

“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 RBA said.

“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,” it added.

“This would weaken the resilience of businesses and households, and so the financial system, to future shocks.”

''In fact, the housing market strength has lessened near-term risks to household balance sheets, reducing the incidence of negative equity, the RBA said.''

“As a result, a larger share of borrowers could sell their property and extinguish their debt if they experienced repayment difficulties, reducing potential losses for lenders,” the RBA noted.

Reuters also reported that the RBA also warned of the growing risk from cyber attacks, which were likely to hit a major financial institution at some point, and the ongoing challenge of climate change.

Market implications

The news arrived at the same time as the Chinese data dump, but there has been no material impact either way on the Aussie which is giving back ground in Asia on Friday.

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