According to the Reserve Bank of Australia’s Financial Stability Review for October, housing finance is less of a danger than it was in the past. However, a number of key economic indicators show there’s still cause for concern in the Aussie property market.

The review acknowledged some problems in the apartment markets in Melbourne and Brisbane, and also highlighted how vulnerable the Aussie financial system is to shifts in the global financial system. China’s high levels of debt and slower economic growth, the sluggish performance of the European banks, the EU referendum, and other threats could potentially undermine the domestic property market.

On the bright side, the review highlighted Aussie banks’ stronger capital buffers and compliance with stricter prudential standards from the Australian Prudential Regulation Authority. And because house price growth has moderated and mortgage borrowers are ahead of their scheduled payments, the risk from mortgage lending has been somewhat reduced.    

Rather surprisingly, the review left out other risk factors that have the potential to undermine the apparently bullish Aussie property market.

Many mortgages are subject to lengthy interest-only periods.

The property market is exposed to some risk because a large portion of mortgage loans are subjected to interest-only periods of typically five years. Many borrowers assume they’ll be able to refinance at the end of the interest-only term into a similar loan with a new interest-only period. However, this rollover isn’t possible in economic downturns when banks start to tighten their lending standards and are likely to cut refinancing.  

Aussie banks have tightened their lending standards and there is room for further tightening. Currently, the rates of people not being able to make their mortgage payments are low, though this could quickly change in an economic downturn.

Property bubbles are pushing prices through the roof.

House prices continue to grow at annualised rates of about 10.2% and 9% in Sydney and Melbourne. While housing price growth has slowed down, prices are still increasing and new mortgages are underwritten based on house prices that are disengaged from national income levels.

The review argues that Aussie mortgage borrowers are on average about two-and-a-half-years ahead of their scheduled payments. However, this argument does not take into account interest-only loans.

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