MNI RBA STATE OF PLAY: H'Hold Debt Worry to Keep Rate on Hold

--RBA Says Household Borrowing Trends Remain Core Area of Focus

By Sophia Rodrigues

     SYDNEY (MNI) - Trends in household borrowing remain a key area of concern

to the Reserve Bank of Australia and will continue to play a major role in its

monetary policy decisions, reinforcing the case for the cash rate to be left on

hold for longer.

     In the bi-annual Financial Stability Review, published Friday, the RBA

didn't indicate if risks to the financial systems have increased or diminished

over the last six months, but the continued focus on the condition of household

balance sheets and the housing market suggests those remain areas of concern.

     "Household balance sheets and the housing market remain a core area of

interest," the RBA said, even as it acknowledged that measures by Australian

Prudential Regulation Authority (APRA) earlier this year have resulted in "some

moderation in housing market conditions."

     The review indicates the RBA's main worry is the impact highly indebted

households could have on the economy's growth prospects before it could impact

the financial system.

     The RBA said household debt, which consists mainly of mortgage borrowing,

is high and gradually rising against a backdrop of low interest rates and weak

income growth.

     While a rise in interest rates could prevent further growth in such

borrowing, the RBA is also alert to the risk that higher interest rates could

make some households more vulnerable. This could potentially cause them to

reduce their spending, which would hurt the economy.

     "Higher interest rates, or falls in income, could see some highly indebted

households struggle to service their debt and so curtail their spending," the

RBA said.

     The RBA noted that there has been significant moderation in investor credit

growth across all states after the APRA's steps, which included a 10% benchmark

investor lending and a cap on interest-only loans.

     While this should help make household balance sheets more resilient, the

RBA also pointed to the risk that it would constrain some type of potential

borrowers. The impact would be mainly affect financing for apartments and those

who would struggle with higher repayments.

     The review contained several concerns about the apartment market given the

substantial pipeline of supply, though the main concern remained the Brisbane

market. Overall, housing market conditions varied across the country but there

are signs of easing mainly in Sydney and Melbourne, the RBA said.

     Nationally, apartment prices have continued to record weaker price growth

than detached housing, the RBA said.

     Conditions are relatively weak in the Brisbane apartment market, with a

large increase in supply reflected in a decline in prices and rents, the RBA

said. But there are few signs of significant settlement difficulties to date, it

added.

     Another worry related to the apartment market is a tightening in

developers' access to bank finance, which has pushed them to more expensive

non-bank lenders

     The RBA also noted that in Perth, builders and developers face weak demand

for new dwellings and this has resulted in several small- to medium-sized

builders filing for bankruptcy. This is also evident in Brisbane and more

failures could be expected, the RBA said.

--MNI Sydney Bureau; tel: +61 2-9716-5467; email: sophia.rodrigues@marketnews.com

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