Increased housing prices and debt could pose risk to financial stability: RBA

The increase in housing prices and housing debt meant risks to financial stability could be building, the RBA Assistant Governor Michelle Bullock said.

In a speech to Bloomberg online covering the housing market and financial stability, Bullock the banks have strong balance sheets and lending standards are being maintained.

But she noted "there is a risk that in this environment, households will become increasingly indebted."

“A high level of debt could pose risks to the economy in the event of a shock to household incomes or a sharp decline in housing prices. 

"It is these macro-financial risks that warrant close watching.

"Sustained strong growth in credit in excess of income growth may result in vulnerabilities building in bank and household balance sheets."

She said the central bank was “continually assessing” any need to consider macro-prudential tools.

"We are monitoring the surprising and dramatic rebound in the housing market and asking ourselves whether there are financial stability risks from these developments and the accompanying rise in housing credit."

Despite some moderation during the recent lockdowns in NSW and Victoria, she noted the strength has been broad based across states and across metropolitan and regional areas and particularly in detached housing.

The macro-prudential tools would likely be “targeted at the risks arising from highly indebted borrowers,” Ms Bullock said.

Tools that address loan serviceability and the amount of credit that can be obtained were more likely to be implemented.

“Indeed we have seen such tools used in a number of countries in recent times and they could be employed in Australia should the circumstances be judged to warrant it.”