RBA warns property investors can exacerbate housing risk

The Reserve Bank is watching the looming expiry of a batch of interest-only loans that were written before mortgage lending standards were tightened.

Reserve Bank assistant governor Michele Bullock told a conference in Sydney on Tuesday that a "large proportion of interest-only loans are due to expire between 2018 and 2022".

"There is still a large stock of housing debt out there, some of which probably would not meet the more conservative lending standards currently being imposed," Ms Bullock said.

When current interest only loans expire, some borrowers will simply move to principal and interest repayments as originally contracted, while others may seek to extend the interest-free period if they can meet the current lending standards.

Investors tend to have larger deposits, and hence lower starting loan-to-valuation-ratios. RBA

"There may, however, be some borrowers that do not meet current lending standards for extending their interest-only repayments but would find the step-up to principal and interest repayments difficult to manage," Ms Bullock said.

"This third group might find themselves in some financial stress. While we think this is a relatively small proportion of borrowers, it will be an area to watch."

Stress 'relatively low'

She also said that investor borrowers could pose greater risks to financial stability than owner-occupiers, because they are more likely to sell into a distressed market to minimise capital losses, exacerbating the impact of any crash on all home owners.

In a speech to a conference on responsible lending, Ms Bullock said that the overall level of stress among mortgaged households remains "relatively low", and even though household debt levels are high and some owner-occupiers are experiencing some stress, "this group is not currently growing rapidly".

The average household mortgage debt-to-income ratio has risen from around 120 per cent in 2012 to around 140 per cent at ... — The average household mortgage debt-to-income ratio has risen from around 120 per cent in 2012 to around 140 per cent at the end of 2017. RBA

However, she said the central bank is watching investor borrowers because the nature of their borrowing - often to avoid paying down debt to maximise tax advantages - had the potential to put them into a challenging position more quickly than borrowers retiring principal and paying interest.

Warning on negative equity

She observed that many investor borrowers take out interest-only loans so that their debt does not decline over time.

So if housing prices were to fall substantially, "such borrowers might find themselves in a position of negative equity more quickly than borrowers with an equivalent starting LVR that had paid down some principal".

As recently as 2016, mortgage repayments were not at levels that would indicate an unusual or high level of financial ... — As recently as 2016, mortgage repayments were not at levels that would indicate an unusual or high level of financial stress for most owner-occupiers. RBA

"Indeed, the macro-financial risks are potentially heightened with investor lending. For example, since it is not their home, investors might be more inclined to sell investment properties in an environment of falling house prices in order to minimise capital losses," she said in Sydney.

"This might exacerbate the fall in prices, impacting the housing wealth of all home owners."

But she added that investor borrowers could also be safer, because they tended to have larger deposits, and so lower starting LVRs, and more properties and income, which could help them absorb economic shocks.

Despite the risks, Ms Bullock told the Informa event that due to strong bank capital levels and the prudential standards, "the risks to financial institutions and financial stability more broadly from household mortgage stress are not particularly acute at the moment."