RBA issues warning to over-eager investors

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RBA governor Glenn Stevens has issued a warning to property investors not to get carried away in growing housing markets.

In a speech to the Econometric Society Australasian Meeting and the Australian Conference of Economists, Stevens warned that investment activity, particularly in Sydney, had increased significantly and that investors should remain prudent.

"Investors should take care in the Sydney market, which is the main area where a large increase in borrowing has been occurring. The total value of credit approvals for investor loans in New South Wales as a whole is about 130% higher than in 2008, and it is in the investor segment where there has been evidence of some increase in lending with loan-to-value ratios above 80% in the past couple of quarters," Stevens said.

Investors should keep in mind that rapidly growing markets may not remain the norm, Stevens suggested.

"In forming expectations about future price gains and deciding their financing structure, people should not assume that prices always rise. They don't; sometimes they fall," he said.

Stevens also issued an admonition to lenders not to loosen their standards.

"Banks and other lenders need to maintain strong lending standards. APRA has helpfully been reinforcing this point directly with bank boards, as well as stressing the importance of having adequate, higher, interest rate buffers in place, given the current very low level of rates in the market. The maintenance of strong standards will be all the more important given the significant improvement in access to funding via the securitisation market over the past year and the associated increase in competition to lend."

Overall, however, Stevens said housing credit had not grown to worrisome levels.

"To date the amount of new borrowing does not appear, overall, to be imprudent. The rise in the value of loan approvals over the past year of around 20% is certainly significant. It's important to note, however, that scaled by the amount of credit outstanding, the rate of this flow over recent months, while clearly well off its 2011 low point, is actually not that high compared with longer-run history," he said.

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