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REPEAT: MNI: Amid Optimism, RBA Wary Of Credit, Housing Risks

MNI (London)
Repeats Story Initially Transmitted at 03:45 GMT Nov 26/22:45 EST Nov 25
By Lachlan Colquhoun
     LONDON (MNI) - The Reserve Bank of Australia is closely monitoring risks,
including the danger of a more intense property sell-off and declining demand
from China, which could, if they play out, lead it to review its current
guidance for the next interest rate move to be up, MNI understands. 
     The RBA's October Monetary Policy statement held out a likely 2019 rise in
official interest rates from the historic low of 1.5%, a level which has held
since August 2016. This was posited on expectations that wages growth would
continue in 2019, unemployment fall below the current 5% and inflation rise from
an annual 1.9% into the Bank's target range of between 2% and 3%.
     But the Bank is watching a cluster of potential hazards, among them the
possibility of a domestic credit squeeze as the regulated banking sector --
under intense scrutiny by a Royal Commission -- loses its appetite for lending,
particularly for housing.
     The RBA's view is that the Australian housing market is not likely to crash
of its own accord, despite a current 5% fall in residential home prices
nationally from their late 2017 peak. 
     The Bank points out that this has come after a 60% national increase over
the last five years, so that only very recent buyers will have seen the prices
of their properties fall below the purchase price.  Household gearing has also
improved and only around 1% of all households have debt levels which exceed
their assets, while mortgage arrears have been cut back sharply, the RBA's
October Financial Stability Review noted.
     --TIGHTER LENDING STANDARDS
     Tightened mortgage lending rules have also reduced the riskiness of new
housing lending,  although the Bank is aware that there is a point beyond which
this becomes counterproductive.  The Australian Prudential Regulatory Authority
has cracked down on interest only and investor loans, which fuelled the property
boom, prompting many investors to leave the market.
     Any further contraction in credit is likely to come not from regulators but
from the major retail banks themselves, which are currently under the microscope
from the Royal Commission into Misconduct, which is set to report in March.
     The RBA is watching how this will play out, with a downside risk that an
excessive tightening in lending could be detrimental to the economy,
particularly if it also extended to business lending and impacted on employment
growth. 
     Although this scenario would take time to materialise, MNI understands that
it could prompt a review of the RBA's monetary policy and change its current
views on its next move.
     --TRADE WAR FEARS
     The RBA considers that a raft of factors, both global and domestic, would
be necessary to create the preconditions for a housing slide.
     Foremost among these is the potential fallout from any trade war between
the U.S. and China, which is Australia's largest trading partner and has been
instrumental to extending the country's 27-year-long stretch without a
recession.
     Chinese growth, while still over 6%, is now the weakest in 10 years. The
RBA is aware that a slower China will impact on Australia, potentially reversing
employment gains and wages growth and putting more pressure on housing markets.
     As the RBA has noted, much of the wealth of Australian households is in
illiquid assets, most notably in their pension funds and in residential
property. 
     If a worsening economy pushes people to exit the property market with any
significant momentum, then the RBA's monetary policy stance could come under
close review.
MNI London Bureau | +44 203-865-3812 | les.commons@marketnews.com
MNI London Bureau | +44 203-865-3812 | les.commons@marketnews.com

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