RBA warns of dangerous property bubble and interest-only loans

The Reserve Bank Governor Philip Lowe has warned of a dangerous property bubble.

Poor lending practices could lead to dangerous property bubble

Five weeks from the 2016/17 Federal Budget, Reserve Bank (RBA) Governor Philip Lowe has warned of a dangerous property bubble and ‘unusual’ popularity in interest-only loans.

The RBA has directly linked taxation arrangements to the unusual recent popularity of interest-only loans in Australia, with negative gearing giving investors a tax advantage in extending the terms of their loans. The RBA's concerns with interest-only loans relate to the borrower not paying the principal of the loan, meaning if the housing market turns down and or interest rates rise, the borrower is more exposed.

Speaking at the RBA Board Dinner on Tuesday night, Dr Lowe highlighted his concerns about rising household debt. Australia's household debt is now at 125 per cent of gross domestic product, well above other nations such as Britain and the US. Dr Lowe also hit out at banks for writing loans to people who could barely afford them and could be in danger of failing to meet payments should the economy or their personal circumstances change.

In the last year, 40 per cent of all loans written in Australia were interest-only loans. Last week, the Australian Prudential Regulation Authority (APRA) announced that it was now expecting all lenders to limit interest-only loans to 30 per cent of all new mortgage lending.

 “Lenders need to ensure that the serviceability metrics that they use are appropriate for current conditions. A reduced reliance on interest-only housing loans in the Australian market would also be a positive development,” Dr Lowe said.

What do you think? Has relaxed lending criteria resulted in an unsustainable housing boom? Should interest-only loans be limited to less than 30 per cent of all loans written? Are you concerned that we are in a housing bubble? Would you or your family be adversely affected by a fall in housing prices or an interest rate rise?

Read more at abc.net.au
Read more at heraldsun.com.au

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    COMMENTS

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    Barbara Mathieson
    5th Apr 2017
    10:28am
    Gee Ray White just last night said ' no problems'!
    FrankC
    5th Apr 2017
    12:42pm
    Well he would, wouldn't he. His only interest is getting people to buy, not worry them. He is only there to sell at inflated prices, which is why household debt is so far above other countries , and why the great Australian dream, will remain that, just a dream. These people have set this in motion a number of years ago, and everybody followed. I cannot see any justification for house prices to go up by 12.5% in under a year. This is what is causing this once great country of ours to crumble.
    MICK
    5th Apr 2017
    4:10pm
    Only a problem the day the music stops....when interest rates go up. I have been saying as much for several years and the day is coming where many of the 'last in' borrowers who have little equity and dodgy jobs will lose everything.
    Anonymous
    6th Apr 2017
    7:52am
    If you want an unbiased response you dont go to a real estater...they will talk the market up no matter what.

    When the Governor of the Reserve Bank says something then we need to listen.
    Old Geezer
    5th Apr 2017
    10:42am
    Personally I would only borrow interest only money as if you are not on a regular wage then paying interest plus principal does not fit one's income profile. Good thing with interest only money is you can top it up and re-borrow as much as you like whereas interest plus principal locks up your equity.
    Tom Tank
    5th Apr 2017
    10:52am
    People will get caught out bigtime if the warnings of a housing bubble bursting come true. Investing is housing using a SMSF on properties with interest only loans might seem very smart at the moment but if the bubble does burst then the financial exposure could be horrendous and investors get seriously hurt.
    Greed rules unfortunately.
    Old Geezer
    5th Apr 2017
    11:08am
    You can't invest directly in property with SMSFs with interest only money. You have to have about a 40% deposit and the ability to pay back the interest plus principal. Very expensive to do it this way too.
    MB100D
    6th Apr 2017
    8:35am
    Borrowing or gearing your super into property must be done under very strict borrowing conditions called a 'limited recourse borrowing arrangement'.

    A limited recourse borrowing arrangement can only be used to purchase a single asset, for example a residential or commercial property. Before committing to a geared property investment you should assess whether the investment is consistent with the investment strategy and risk profile of the fund.

    Geared SMSF property risks include:

    Higher costs - SMSF property loans tend to be more costly than other property loans which must be factored into your investment decision.
    Cash flow - Loan repayments must be made from your SMSF which means your fund must always have sufficient liquidity or cash flow to meet the loan repayments.
    Hard to cancel - If your SMSF property loan documentation and contract is not set up correctly unwinding the arrangement may not be allowed and you may be required to sell the property, potentially causing substantial losses to the SMSF.
    Possible tax losses - Any tax losses from the property cannot be offset against your taxable income outside the fund.
    No alterations to the property - Until the SMSF property loan is paid off alterations to a property cannot be made if they change the character of the property.
    Old Geezer
    6th Apr 2017
    2:58pm
    I tried to keep it simple Retired Knowall.

    The way I would buy a property in my SMSF would be to set up a trust and then buy units in that trust with my SMSF.

    5th Apr 2017
    11:45am
    As I see it, the problem is all about supply and demand. Today's media tells us that there are about 50,000 housing applications being held up by councils for inordinate lengths of time. For some reason which I find mystifying, developers are persona non grata yet they are the ones who can set up the vacant land to enable housing to proceed.
    Old Geezer
    5th Apr 2017
    11:48am
    It is just another property boom like the one in the early 1990s and it will collapse before long but we will have rising interest rates not falling ones when it does.
    Rosret
    5th Apr 2017
    12:04pm
    It is different this time Old Geezer.
    Because the Banks haven't been able to control the loans due to foreign influence and lending they have been forced to give people high risk loans.
    They are now in a position where they can't control the market by lower or raising the interest rate.
    Lowering it enables more people to borrow forcing the prices up again and raising the interest rate will cause a spiral of home loan default.
    I have never seen anything like the way properties are sold in our district at the moment. There is no price given and everyone has to guess what the seller will accept. Its incredibly inflationary. I don't know how it is even legal.
    Old Geezer
    5th Apr 2017
    12:25pm
    The last house I sold a couple of months ago all I had was the lowest price I was willing to accept. At the start many people told me I was dreaming but in the end it sold for more than my lowest price in a dutch auction. I only put it on the market to test the market as I didn't believe that I would sell it for that myself either.

    Market is similar to 1990s but with low interests rates. In 1990s I bought a house in Sydney at over 30% lower than the original asking price after the market collapsed. However interest rates were at their all time highs and falling today they are the reverse. It will be interesting to see how it all pans out.
    FrankC
    5th Apr 2017
    12:47pm
    And the council dictates that blocks will be the size of a postage stamp. You only have to look at a subdivision in Burpengary East to see this
    Old Geezer
    5th Apr 2017
    1:16pm
    Well what more do you want Frank? No one has time for grass mowing anymore.
    Anonymous
    5th Apr 2017
    3:08pm
    Rosret, here in NSW there is a law against gazumping but, it seems, that real estate agents have found a way around the law. They advertise a property with a price range and sit back and wait. No deposit is taken until all prices are in and properties have been selling at a higher price than suggested. Sharp practice perhaps but apparently legal. A nearby property was advertised at between $465,000 and $495,000 but the final price was a bit over $510,000. A Claytons auction?
    Anonymous
    6th Apr 2017
    7:53am
    Personally it does not affect me...we own our home and have no investment property at all.

    If interest rates go up I will benefit.
    Anonymous
    6th Apr 2017
    12:31pm
    Old Man, yes it is usually about Demand and Supply. However, one needs to identify the specific things causing the price distortions. In this case, the RBA Governor has correctly identified several. On the Demand side, other than Negative Gearing (which should be removed except for one property - to help people get off the ground), the excessive demand from Overseas non-residents, e.g. Chinese investors, needs to be severely curtailed / stopped - RBA Governor seems afraid to mention such "politically sensitive" issues. These two actions will resolve the Demand issue.
    Rosret
    5th Apr 2017
    11:55am
    I just watched the movie "The Big Short" again last. It is amazing to see how the Real Estate market collapsed in the United States.
    It occurred to me that while Australia survived the world financial crisis it may actually be like the flood in Rockhampton. It has just taken this amount of time for impact of their actions to hit us.
    When the world dropped its interest rates the Australian banks had to follow suit or developers would have used overseas money to build. That enabled our equity flush nation to get huge loans and push the prices of homes above rational levels.
    Now its got to the point where homes prices bare no relationship to the actual value of the product.
    If only investors and developers can buy into the market we are going to have a whole generation of young people who will never own a home.
    I notice that the construction sites are full of non English speaking workers. Its easy for foreign workers to "go home" if bankruptcy befalls them and they don't have to be accountable for over priced apartments.
    Old Geezer
    5th Apr 2017
    12:17pm
    In normal times a certain percentage of apartments have to be presold to get finance. These are usually sold at a discount. Today even these are being sold above the asking price so there is no way I'd want to buy them even if all I have to supply is a bank bond instead of a deposit.
    Rae
    5th Apr 2017
    1:51pm
    The two main causes of the chaos in the Great Depression and America 2009 were excessive and unregulated debt then fear causing a collapse in demand.

    I saw the collapse in the US in 2009 it was incredible. People just stopped spending.

    That hasn't happened here. We have the debt but not the fear. The government just needs to stop the fear from cutting in and we'll be right yet again.

    Can they do it? Time will tell.
    Rosret
    6th Apr 2017
    7:00am
    Rae we don't need fear but we do need regulation.
    Open up new housing estates with fixed prices. Control the increase in property valuation. Stop the dutch auctions. Build multi storey apartments for people with incomes less than $100k and who do not have another home.
    Ensure apartment sizes are big enough for families and have off road parking.
    Councils and State Governments have the power to control this. They are not using it because they are raking in a motza from GST and stamp duty and rates.
    I am sure we all just got our letter from the Valuer General. I am not sure how a population with no salary increases can keep paying for higher rates.
    Rae
    6th Apr 2017
    7:54am
    I agree Roscret the rate rises and insurance increases will certainly effect main street business. If you have no disposable income left then you can't spend.

    Where I live around 30 years ago a lot of the retirees were forced to sell acreages because of very high rate increases.

    That rural land then became housing estates.

    Nasty little rabbit warrens of overpriced, poorly built millstones around the necks of those still trying to pay for them and the large energy bills that houses needing huge amounts of heating and cooling cost.

    Many OAP will be forced to sell by this government's policies but they love them anyway. They will blame the unions. You wait.
    Anonymous
    6th Apr 2017
    7:54am
    Never would I buy off the plan..
    Old Geezer
    6th Apr 2017
    1:30pm
    I've done very well out of buying off the plan in the past but not in this market.
    floss
    5th Apr 2017
    12:14pm
    Negative gearing capital gain and modern day immigration are all factors that add to our problems, will this mob fix the problem no they are the problem. Yes they may not survive another election but what a mess this country will be in by then.We pay cash and have not borrowed money for the last fifty years if you can do this you be a mile in front when you retire.Most pollies negative gear so are very reluctant to change this tax dodge both sides do it.
    Old Geezer
    5th Apr 2017
    12:19pm
    Nothing wrong with borrowing money if you can get a higher return than the interest. I do it myself. However today I'm cashed up and have no borrowings as it's too risky for even me.
    Not a Bludger
    5th Apr 2017
    12:58pm
    O me miserum.

    The doomsayers and the naysayers are at it again - shock horror, we will all be ruined and bankrupted - the RBA, too, cannot help themselves but join in this " if, but or maybe" cacophony of looming gloom and doom.

    All you economists (aka the dismal science - except that it is not a science at all just a few individually based assumptions followed by a "best" guess) take a deep breath and a reality pill.

    Melbourne and Sydney are both world size cities of 4.5/5.0 million people - of course house prices will be high - and further, two income (or more) houshoulds have the capacity to service much higher levels of debt than did the single income household of the past.

    Buying the first house is hard today but comparatively no harder than it was for the last generation, the generation before that and so on - in fact, house ownership in Australia continues to be very high,by any standard.

    So, let's just get on with it and stop this constant, whinging hunt for culprits to blame.
    Old Geezer
    5th Apr 2017
    1:19pm
    I remember hearing all this just before the last housing bubble burst too.
    Colours
    5th Apr 2017
    5:39pm
    We bought our first house in 1976 for $16,000. That was about twice the average annual wage. The average wage has gone up almost by a factor of 10 (from $7,600 to $72,000). But that house would now be worth close to a million dollars, a factor of over 60 times. There is simply no way Sydney or Melbourne are affordable to entry level families. If anything does come up in their price range, it is snapped up by investors who, unlike them, get a tax deduction on their expenses.
    KSS
    5th Apr 2017
    5:49pm
    And yet people are still buying houses Colours and more want to buy than are available. Prices go up, people still buy, still not enough so prices go up, people still buy.........
    Anonymous
    6th Apr 2017
    7:57am
    Many people have not factored in an interest rise and will be sailing close to the wind when they do go up.

    I would never take out a mortgage unless I had the capacity to pay a lot more on my mortgage than needed.
    World Prophet
    5th Apr 2017
    1:23pm
    Obviously the task is to create more affordable housing without causing a slide in general property values. It has to be accepted that living in close proximity to employment centres is always going to have a premium price. The biggest problem with housing availability is the commuting distance, and hence time, and the availability of housing stock. The answer is not creating higher density housing. That only leads to more congestion and poorer quality of life. The answer lies in reducing the commute time to satellite centres in the country, where housing is vastly cheaper and quality of life is much better. Government has to do it's part in constructing Very Fast Train links to current employment centres, so that commute times from country towns is reduced to less than an hour. It also has to facilitate the release of more land in country centres and build more infrastructure such as schools and hospitals. Doing the same thing over and over, expecting a different outcome is just stupidity. We need political leaders who aren't afraid of doing some innovative thinking.
    Rae
    5th Apr 2017
    1:25pm
    The economy is booming people. Corporate profits are up 20% just last quarter. We can afford to cut company taxes. No budget problem anymore obviously.

    5th Apr 2017
    1:33pm
    Australia world’s worst money laundering property market.

    We van thank the Liberal Government.

    https://www.macrobusiness.com.au/2017/03/report-australia-worlds-worst-money-laundering-property-market/
    Brissiegirl
    5th Apr 2017
    1:40pm
    When will politicians finally understand and address the major problem with cashed up Chinese parents buying up Australian real estate for their student kids who plan to apply for residency and "stay on", applying for citizenship when their studies are over. This sneaky backdoor entry to Australian real estate is inflating our market and should be disallowed. It should have been stopped years ago. Whatever auction you go to, there's the determined Chinese bidder prepared to pay $100,000+ over the fair and expected sale price. Australian buyers just cannot compete or if they do, they get into so much debt their lives become a financial misery. It's a phenomenon that is artificially pushing up house values. I read somewhere that the Canadians have finally put a stop to this scheming - too late - but perhaps better late than never. Chinese high-rise off-the-plan borrowers are already walking away from their financial commitments to apartments that are already decreasing in value. What a mess. Australian residential real estate should be for long-term, committed Australian buyers and the rest should just go jump.
    Boof
    5th Apr 2017
    4:09pm
    If anybody knows of young people (rellies), I offer this info. I advised a friend, who in the early eighties bought a house through a BANK. A 20 year loan on $150,000We went to then, The Maritime CREDIT UNION. Cutting short. The CREDIT UNION refinanced the loan & paid out any penalties. It saved him, Keith McInnes of Belfield, $180,000, over the 20 year period. He actually received a redundency & paid the loan early, with no penalty. MESSAGE. DON'T BORROW FROM A BANK. FIND A GOOD CREDIT UNION.
    Colours
    5th Apr 2017
    5:30pm
    Prices are rising because people think they will continue rising. That is the definition of a bubble, and it will burst. Once prices come down and interest rates go up, panic selling will start, both by over-extended home owners and investors who see no capital gains on the horizon.
    KSS
    5th Apr 2017
    5:44pm
    If people can only 'afford' interest only loans then they shouldn't be taking out any mortgage at all. Being only able to afford that loan at today's record low interest rates is simply asking for trouble as soon as the rates rise, as they inevitably will. Both sides are at fault, the lender for not checking the ability to pay at rates above current, and the borrower who thinks rates will never go up again. Watch them complain when rates do rise and people start defaulting because they can't afford the rise and then doubly so when the capital repayment kicks in.
    Bugeye50
    5th Apr 2017
    5:58pm
    Everyone blames the Councils for holding up land releases and the ever decreasing lot sizes. Nothing could be further from the truth. The big developers, including Urban Growth (formerly Landcom, a government institution) time their land releases for the best possible financial gain. The lot sizes are also determined by the State Government. They hold a gun to the Council's head and tell them to come up with a DCP, LEP, Master plan etc. to its satisfaction, otherwise they will enforce their own. The Government, both State and Federal, do not give a diddly squat about housing shortages, housing affordability, rising mortgage costs etc. Look at the windfall it's bought the state government. No wonder NSW is finally in the black.Make no mistake the state is just as culpable as the big developers in forcing lot sizes down and prices up. Actually Councils are in an unenviable position, in so far as they get the blame for holding up development by trying to control it for the betterment of their communities. So take the blinkers off you knockers and point the finger where it rightly belongs. End of rant.
    Rae
    6th Apr 2017
    8:00am
    NSW is in the black because it has sold everything we owned. Once that road is built where is revenue to run the State going to come from? Land taxes probably and GST increases. Start saving for it.
    Old Geezer
    6th Apr 2017
    11:09am
    It won't be long before stamp duty on real estate purchases is replaced by a land tax on all properties. NSW government wants a more stable income stream.
    niemakawa
    5th Apr 2017
    6:25pm
    Same same old. FCS let the bubble burst and see what happens.
    MICK
    5th Apr 2017
    11:07pm
    Ditto.
    Only thing is the bubble did not burst in the 1980s when real estate had run its course. It just increased at a woefully miniscule rate for 20 years. Will this time be any different?
    This time may be different. Never in our lifetime has world debt been at the never to be repaid levels it is at now. That'll be interesting.
    Rae
    6th Apr 2017
    8:02am
    Take a look at 1890 Mick. What happened was interesting. Not that the same thing happens but the same causes seem to keep cropping up.
    MICK
    6th Apr 2017
    4:52pm
    They say history repeats itself.
    FEDUP
    6th Apr 2017
    4:35am
    In the 1950's Sydney had suburb after suburb, consisting of cheap Housing Commission Homes, which the states rented out. Then when strapped for cash, they decided to sell them to the tenants, if they wanted to purchase them. As the population grew, so did the need for homes, from a population of around a million in 1950 to Six million today. There is only one reason driving the market, and that is supply. As to Interest only loans, those who have them are at the mercy of the Banks, as they will always raise the interest rate on home loans, or some stupid politician will say "Banana Republic". The rate will soar to 18%, all those "investors" will be driven to the wall, as they will not have enough liquidity to pay their loans. The Banks will foreclose, a glut will appear in the market place, prices will plummet, and then the circle begins again.
    Solution: Lower negative gearing to only one property, with a maximum tax benefit of $30K, bring Capital Gains Tax on properties not held for at least 35 years. That way it is fair to all. Even the Opposition would agree, as would most in the Senate. Plus allow pensioners to be able to downsize with no penalty, CGT or State Taxes.
    water greg
    6th Apr 2017
    7:56am
    Buy a house for say $500,000 interest only loan of say 6% per annum sell it next year at the ever increasing prices of say $550,000. Is interest only poor economics.
    Old Geezer
    6th Apr 2017
    11:07am
    Most investors would be borrowing at 1% to 1.5% above the cash rate so no where near 6%.

    It would be OK but for costs like stamp duty, agents and solicitors fees.

    Buy $500,000 worth of BHP say and if it goes up 10% you get to keep a lot more of the gain. Brokerage in and out would be about 2%. BHP up over 50% in last 12 months.
    Culgoa
    6th Apr 2017
    9:47am
    Have been through two property booms and as sure as the sun rises, the crunch is coming. The bigger the boom, the bigger the bust.
    Old Geezer
    6th Apr 2017
    11:00am
    I agree.


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