Housing markets remain weak with future uncertain: Council of Financial Regulators

Housing markets remain weak, particularly in Melbourne, Sydney and Perth, according to last week's meeting of the Council of Financial Regulators.

The group meets quarterly to discuss systemic risks facing the Australian financial system, regulatory issues and developments relevant to its members.

However, the council suggested the adjustment in housing prices and activity has been orderly and did not raise material financial stability concerns.

Housing prices nationally have fallen by 6.5% over the past year, but this has followed a period of large price gains in some areas.

Further, the improvement in banks’ lending standards – including a lower share of high loan-to-valuation ratio lending – means that households and lenders generally are less vulnerable to falling housing prices than in the past, it noted.

Despite historically high household debt, signs of financial stress remain relatively contained given a strong labour market and low interest rates.

The Council noted that while mortgage arrears rates remain low, they have reached a post-financial crisis high.

"This largely reflects regional conditions," the minutes suggested.

It concluded overall that future paths of housing activity and prices remain uncertain.

The Council discussed the slowdown in housing credit growth and the weaker conditions in the housing market.

Members agreed the evidence from data and consultations with banks indicated that the slowing in credit largely reflects weaker demand, particularly from investors.

There has also been some tightening of credit supply over the past year as lenders have applied their lending policies more stringently and undertaken more detailed scrutiny of borrowers’ expenses and other liabilities.

It noted there remains strong competition for borrowers of low credit risk.

The Council agencies will be closely monitoring the extent of any further adjustments, and in particular the ongoing availability of credit.

It also noted members observed that new lending to small businesses has slowed over the past year.

"For many small businesses, personal and business finances are intermingled," the report said.

"As a consequence, the higher standards that lenders apply to personal borrowing are affecting some small business loan applications.

"Further falls in housing prices could constrain small business borrowing, given that around half of loans to unincorporated businesses are secured by residential property."