#AceFinanceNews – Featured Report:Australia:May.14: A leading ratings agency has warned that Australia’s banks face challenges from a future house price fall, while previously secret Reserve Bank documents show it wants a bigger slowdown in investor loans.

Moody’s research released yesterday finds that, while Australia’s banks are relatively safe for now, they are likely to face financial challenges from a future fall in home prices.

"Australia’s housing market risks are skewed towards the downside," Moody’s opined.

"Elevated and rising house prices are intensifying imbalances in the housing market."

One of those imbalances is the unprecedented surge in lending to property investors, particularly in Sydney.

Late last year, the bank regulator APRA announced that it would be asking financial institutions to keep investor loan growth below 10 per cent per annum growth.

However, since then, investor lending growth has actually accelerated to burst through the 10 per cent mark overall, especially after the Reserve Bank’s February interest rate cut.

Embed: Home lending growth

Yet documents released by the Reserve Bank under freedom of information show that a slower 6 per cent growth rate for investor housing credit is a more appropriate target.

Such a growth rate would be consistent with owner-occupier loan growth which the bank said, "has not been seen as adding materially to systemic risk", whereas 7 per cent was seen as potentially too high.

Hitting the 5-7 per cent range of investor loan growth would require a 10-20 per cent fall in loan approvals, whereas the value of investor approvals jumped 6.4 per cent in March.

The likelihood of an outright house price correction is rising.

Moody’s report

In notes for potential questions on the issue, the Reserve Bank explained that APRA had deliberately set the 10 per cent benchmark for individual banks a little above the actual desired economy-wide rate of investor loan growth.

"Some lenders will have investor credit growth well below this benchmark anyway, so if all lenders do end up at least a little under this benchmark, which we hope they will, then aggregate growth in investor credit will be noticeably below 10 per cent," the RBA document noted.

However, ABS and RBA credit figures so far appear to show that this theory is not working in practice, with many lenders clearly still exceeding the 10 per cent target.

If regulators do want to achieve 6 per cent investor loan growth, especially after the latest rate cut, the clear conclusion is that they will need to take tougher action against individual banks breaching the 10 per cent limit and/or lower that benchmark further.

Investor surge, high prices, high debt raise risks: Moody’s

The need to rein in investors is twofold: firstly, they are the main factor pushing up prices in Australia’s two largest housing markets; and, secondly, they have a higher risk of default than owner-occupier borrowers.