Investors Are Driving Up Australian House Prices, But The RBA Isn't Worried Yet

The RBA looked at the state of the housing market in its Financial Stability Review (FSR), released today, but it is clear that while it is alert to potential systemic problems related to investment purchases of housing it is not, for the moment, alarmed.

The RBA says:

an upsurge in speculative housing demand would be more likely to generate financial stability risks if it brought forth an increase in construction of a scale that led to a future overhang of supply and a subsequent decline in housing prices. At a national level, Australia is a long way from the point of housing oversupply, though localised pockets of overbuilding are still possible

So, the RBA is watching the recent upswing in “high density dwelling construction approvals in Sydney and Melbourne”.

But it is also thinking about the different loan risk profile that banks are taking on in lending to investors, because more than half of these types of loans are interest-only as investors maximise the tax deduction benefits.

This means they tend to be paid off slower than a normal owner occupied loan. This raises the potential for an investor to fall into “negative equity” the RBA says.

But the centrral bank also believes that while they are watching, there is no cause for concern, given that the buyers of these investment properties make up such a small amount of total loans.

The RBA said: “On balance, therefore, while the pick-up in investor activity in the housing market does not appear to pose near-term risks to financial stability, developments will continue to be monitored closely for signs of excessive speculation and riskier lending practices.”

So, they are alert. But not alarmed.

NOW WATCH: Money & Markets videos

Want to read a more in-depth view on the trends influencing Australian business and the global economy? BI / Research is designed to help executives and industry leaders understand the major challenges and opportunities for industry, technology, strategy and the economy in the future. Sign up for free at research.businessinsider.com.au.