SYDNEY (Reuters) - Australia's central bank on Friday warned a rise in the jobless rate or further steep falls in property prices could exacerbate risks for the country's slowing economy, although the banking system is now resilient enough to weather the storm.
In its 76-page Financial Stability Review, the Reserve Bank of Australia (RBA) emphasised the banking system had the capital to withstand a major crisis, even as it highlighted the threat to households from a further slump in home prices.
"Although lending standards have improved and housing credit growth has slowed, the ongoing high level of aggregate household indebtedness remains a key vulnerability," the bank warned.
"But most indebted households can afford their debt repayments."
Australia's household debt-to-income ratio is at a record high of around 190 percent making them vulnerable to higher interest rates or loss of employment. Indebted households are also more likely to reduce spending if macroeconomic conditions deteriorate, amplifying the impact of a downturn, the RBA said.
Home prices in Australia are now 7 percent below their 2017 peak, although they are still almost 30 percent higher than in 2013. Unemployment is at an eight-year trough of 4.9 percent while the official cash rate is at a record low 1.50 percent.
In addition, most households have ample equity in their property which means it would take much larger price falls to leave the value of their homes lower than their debt, the RBA noted.
Australia's housing stock is valued at A$6.8 trillion ($4.83 trillion), or almost four times the country's annual gross domestic product.
"The prevalence of negative equity is low, but substantially larger price falls would see a large share of households' housing equity eroded or even turn negative," the RBA said.
"That would increase the risk of costly defaults for lenders if unemployment were to rise."
Sentiment toward the property market had turned cautious around 2017 when regulators began tightening lending standards to head off a possible bubble in the sector. That together with a spate of scandals exposed during a year-long inquiry led the banks to rein back on lending.
The RBA welcomed the "significant improvements" in banks' housing lending standards, adding stress tests indicate banks have sufficient capital to withstand double digit unemployment rates and housing price falls exceeding 30 percent.
"Overall, the financial system appears much better placed to respond to a range of challenges than it was a decade ago," it added.
SHADOW LENDING
Non-bank mortgage lending accounts for less than 5 percent of outstanding credit, the RBA said, noting they were not a substantial financial stability risk at this point. The potential for contagion from non-banks to banks also remains small, it added.
Non-bank mortgage lending has risen about 15 percent annually in recent years, but the RBA cautioned these estimates were based on "incomplete data" that may be revised over the coming year.
The RBA also focussed on risks in high-density apartment markets, saying the large influx of supply has the potential to exacerbate housing price declines. The threat is the highest in Sydney where a "considerable volume" of new supply is due to be completed over the next couple of years.
But there are signs property price falls may be bottoming. Data out earlier this week showed Australian home loans, a lead indicator for prices, had bounced in February after falling every month since October 2018.
In addition, auction activity has also picked up in recent weeks.
"The challenges in apartment markets are occurring in a generally positive macroeconomic environment with strong population growth, favourable labour market conditions and low interest rates likely to support housing demand going forward."
(Reporting by Swati Pandey; Editing by Wayne Cole)
