The bi-annual Finance Stability Review (FSR) was released this week by the Reserve Bank (RBA).  The document provides a guide as to the RBA’s thoughts on the overall economy and potential risks.

The residential housing market features heavily in their assessment of financial stability. Some of the key themes for the housing market from the document are:

Housing Loan Performance:

The report details that the lack of repayment distress across Australian bank mortgage portfolios is being supported by low interest rates which make servicing the loan easier.

This is illustrated with the share of non-performing banks housing loans is extremely low (0.6% Dec 2014 down from 0.9% 2011).

Competition Amongst lenders

There is plenty of competition amongst lenders and it has remained rigorous for the past six month.  There are very attractive fixed rates and significant discounts to be had off their advertised variable rates.

Refinancing activity has also increased due to banks increasing commissions being paid to their brokers.

The RBA highlighted that the rising use of the broker channel could create risks, specifically that misaligned broker incentives could create higher level of lending outside their risk tolerance.

Lending Criteria

The RBA acknowledge some banks have applied some stricter criteria for certain markets, but overall they are reporting that serviceability and deposit criteria have been relatively unchanged over the past six months.

Investor Lending

The FSR reported that investor housing credit over the past six months has increased at an annualised rate of 10.5%.

It is too early to expect a slowdown in investment lending in a response to the Australian Prudential Regulation Authority (APRA) guidelines just yet.

The pipeline of pre-approvals was already in place before APRA wrote to Australian Deposit-taking Institutions late last year highlighting a guideline of a cap of 10% annual growth in lending to investors.

It is clear in the FSR that the RBA along with APRA are closely monitoring the overall market conditions and are on the lookout for risks and an easing of lending standards.