Commercial property more vunerable to boom-bust than residential: RBA's Luci Ellis
The head of the Reserve Bank of Australia's financial stability department, Luci Ellis, has said it would be a "mistake" to assume the main risk to the health of a financial system came from housing markets.
The senior RBA official says housing markets are not the biggest threat to financial stability, despite the international turmoil that has triggered property crashes across the world.
Noting commentary that Australia could be vunerable she suggested commercial property markets were more likely to threaten financial stability than residential property or the sharemarket.
"Let me be clear: risks from housing markets are not zero, and never will be," she said in a speech to the CPA Australia Finance and Accounting Expo 2012 in Sydney yesterday.
"But commercial real estate or property developers are still more likely to pose risks to a financial system, and through it to the real economy," Dr Ellis said, in comments that were not confined to Australia.
The nation's banks were holding about $8 billion in impaired loans in the sector in the June quarter, the Reserve's latest Financial Stability Review found.
Ellis made the remarks in a speech arguing that when looking for lessons from the global financial crisis, it was important not to come to "mistaken conclusions".
"We also had yet another iteration of the old lesson that property market dynamics can drive episodes of financial instability.
"Ten years ago, the global debate about whether monetary policy should respond to asset prices was rather unhelpfully focused on equity markets, which at the time did not have the kind of leverage that is the nub of the problem.
"The crisis has shown that property markets are usually more relevant to financial stability.
"These markets have the boom–bust dynamics and leverage needed to turn an asset price downturn into a financial crisis."
Along with her commentary on residential and commercial markets, Ellis argued against simplistic metrics to gauge the health of a banking system.
She said it was "misleading" to focus too much on loan-to-deposit ratios – which are relatively high for Australian banks, at more than 120%.
"If you see a bank with a very low level of this ratio, well below 100%, ask yourself what the bank is doing with that deposit funding instead," Ellis said.
"They are investing it in securities and other kinds of investment. And as we saw in the crisis, those securities can often be far riskier than regular lending."
With banks being forced to hold more top-tier capital under new global rules to make the sector more resilient, Ellis also said regulators could not afford to assume highly capitalised banks would necessarily be safer.
