Does the housing property market need to be reined in? The Reserve Bank of Australia (RBA) thinks so!

The RBA is reportedly considering ways to rein in the booming housing market and protect the economy.  This could mean property buyers may see tougher lending rules as there are concerns investors are inflating prices.

In the past year, house prices have risen more than 10 per cent according to RP Data; In Sydney, it has increased almost 24 percent in two years.

The industry has also seen investor finance growing at double digit rates. This is almost half the flow of new approvals.

So how will the RBA influence tighter lending?  The RBA is monitoring banks’ lending practices more closely to make sure they remain pragmatic.

In collaboration with Australian Prudential Regulation Authority (APRA), the RBA is looking at taking additional steps to ensure lending practices towards investors are maintained and sound.

These additional steps may involve credit-rationing (used in 1980’s), limiting loan to value ratios, forcing banks to put aside more capital or imposing tougher tests to grant loans.

In an attempt to protect the financial system and the wider economy, it wants to curb risky lending. In an environment of rising house prices most of the lending is interest only.

If house prices fall, the RBA fears home owners may start struggling with repayments and declining wealth which in turn, may reduce spending and hurt economic growth in the process.

Usually when the property market is hotting up, the RBA would look at raising interest rates, however due to the uncertainty for the rest of the economy the risk of a rate increase is unlikely.

With these proposed tighter lending strategies, it seems that this would impact first home buyers more than it would investors; as investors tend to have a greater equity buffer more than first home buyers.