Watch your yields, RBA warns as commercial property risks rise
Rising risky investment in the residential and commercial property market could inflict pain for the broader economy, the Reserve Bank (RBA) has warned in its semi-annual financial stability review.
The commercial property sector was especially under closer scrutiny now as the RBA identified a build up in risks in an area that has "posed a disproportionately large risk" to the financial system.
The comments, reiterating past warnings about the threat, noted competition among lenders remains vigorous in a number of domestic markets and lending margins have fallen.
"Property-related lending has been a particular focus of the competition in the corporate lending market, said the RBA.
"Although the Australian banking system’s exposure to the commercial property sector declined following the global financial crisis, and the recent lending has not increased its share of banks’ domestic assets, risks in this area appear to be building.
"Investor demand for both new and existing commercial property developments has been strong, despite weakening leasing conditions in a number of market segments.
"Particular caution around collateral valuations is warranted in the current environment of declining property yields.
"Lenders should also be mindful of the collective effects of strong lending activity within particular market segments, even if individual borrowers appear to be of low risk.
It noted at this stage, competitive pressures have not induced a material easing in non-price housing lending standards.
"The composition of new mortgage finance remains skewed to investors, however, particularly in the largest cities.
"Ongoing strong speculative demand would tend to amplify the run-up in housing prices and increase the risk that prices in at least some regions might fall significantly later on.
"In the first instance, the consequences of such a downturn in prices are more likely to be macroeconomic in nature because the effects on household wealth and spending would be spread more broadly than just on the recent property purchasers. However, the further housing prices fall in that scenario, the greater the chance that lenders would incur losses on their housing loans.
"At the margin, the recent decline in mortgage interest rates can be expected to boost demand for housing further, though it will also make it easier for existing borrowers to service their debts.
"Indicators of household stress are currently at low levels, but could start to increase if labour market conditions weaken further than currently envisaged"