The Reserve Bank of Australia (RBA) is considering imposing tighter bank lending standards amid growing concern about how the financial system would handle a hypothetical collapse in house prices, beginning with apartments in Brisbane.

Michele Bullock, the Reserve Bank’s assistant governor (financial system), said during a recent business event in Sydney that the RBA was particularly uneasy about the looming oversupply of apartments in Brisbane and possibly some parts of Melbourne.

“There are indicators that, in the event of a downturn, there might be systemic issues for the banking system,” she said. “It is about whether or not they are adequately provisioned, whether their lending standards are adequate, and if there is an oversupply and falling prices, whether they end up underwater or wearing larger losses than they expected because they hadn't anticipated this.”

Bullock was particularly concerned about households that purchase apartments in high-risk cities with the expectation that rents and prices would rise, but would not be able to find tenants due to the incoming glut of apartments.

The Australian Prudential Regulation Authority (APRA) instructed banks to tighten lending standards for investors in 2014, and has since succeeded in keeping investor lending growth below 10%. However, “everyone [should] be aware that more recently, investor housing growth has started to speed up again,” Bullock said.

In the year to January, lending to property investors increased by 27%. Investors borrowed $13.8bn that month – more than the $13.6bn that was lent to owner-occupiers. Of the $13.8bn, only $1.2bn was for building new homes, according to CoreLogic.

“We are watching it because investors can be the first ones to get out if things turn down,” Bullock said. She warned that a rush for the doors could make a slump much bigger than it would otherwise be. “We don't want households to find themselves in a situation where they have to emergency sell or whatever because they can't afford [the investment] anymore.”

Concerns about investor borrowing are likely to keep interest rates higher than they would otherwise be. “The governor has noted that there is a balance between the interest rates that are needed to support the economy and interest rates that might be fuelling borrowing and investing,” Bullock said. “These are the issues that are on the mind of the governor and the board.”

In a note to clients on Monday, JP Morgan analysts Ben Jarman and Tom Kennedy said that the “only path out” for the RBA was to tighten controls on lending rather than lifting rates, as the latter would be misguided during a time when the economy was fragile.
 

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