A US regulator is already worrying about the next property bubble

A US regulator warned that banks risk inflating a commercial real estate (CRE) bubble.

Thomas Curry, US comptroller of the currency, said banks were easing checks on borrowers and boosting loans to investors in the sector.

This creates more debt of a poor quality, at a time when valuations of the underlying property assets are already stretched.

“It’s at this stage of the cycle that we also see strong loan growth combined with easing underwriting to result in increased credit risk,” Curry said in a speech on Monday.

“At the end of 2015, 406 banks had CRE portfolios that had grown more than 50 per cent in the prior three years. Of note, more than 180 of these banks more than doubled their CRE portfolios during the past three years.”

Here are the charts from the regulator on how the sector is performing. The price index for office space has shot up from 70% to 120% within six years:

The combination of high debt levels and lax risk management could prove to be toxic, Curry said: “At the same time we are seeing this high growth, our exams found looser underwriting standards with less-restrictive covenants, extended maturities, longer interest-only periods, limited guarantor requirements, and deficient-stress testing practices.”

Banks are struggling to find safe, profitable assets in a world where more than $10 trillion (£7.6 trillion) in government bonds has a negative yield, so they are turning to riskier debt.

The comptroller said banks were caught in a trap of having to innovate and lower credit standards to stay competitive, while at the same time needing to manage risk.

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