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Posted: Wed, 05 Apr 2017 05:59:01 GMT

RBA Governor Philip Lowe has a sobering warning for bank customers.

THE lure of property market riches and interest-only lending by banks is sending vulnerable households towards financial crisis and the central bank is worried.

Reserve Bank governor Philip Lowe is warning that household debt is rising and the property element jumped 6.5 per cent over the past year.

But household income rose just three per cent leaving families with “the skinniest of buffers” against being overwhelmed by repayments.

Many families are managing this well, Mr Lowe told a Melbourne RBA dinner last night.

“At the same time, though, slow growth in wages is making it harder for some households to pay down their debt. For many people, the high debt levels and low wage growth are a sobering combination,” he said.

But rising property prices are encouraging people to buy houses as investments in the hope of ongoing capital gains.

And low interest rates — the cash rate remains at 1.5 per cent — have only encouraged borrowing, with some banks handing out money without stringently testing that customers can actually pay off the loan.

RBA Governor Philip Lowe has a sobering warning for bank customers.

RBA Governor Philip Lowe has a sobering warning for bank customers.Source:News Corp Australia

The Australian Prudential Regulation Authority (APRA) has been concerned by this for some time and is monitoring lending practices.

“Despite the focus on this area over recent times, too many loans are still made where the borrower has the skinniest of income buffers after interest payments,” Mr Lowe said.

“In some cases, lenders are assuming that people can live more frugally than in practice they can, leaving little buffer if things go wrong.

“So APRA quite rightly has said that lenders can expect a strong supervisory focus on loans with a very low net income surplus.”

The RBA chief also pointed at the rising use of interest-only lending. APRA’s preferred limit of 30 per cent of these loans in total housing lending was not either followed.

“Over the past year, close to 40 per cent of the housing loans made in Australia have not required the scheduled repayment of even one dollar of principal at least in the first years of the life of the loan,” he said.

“Only interest payments are required.

“This is unusual by international standards. In some countries, repayment of at least some principal is required on all housing loans for the entire life of the loan. In other countries, interest-only loans are available only if the borrower has already contributed a

fair degree of equity.

“So this is one area where Australia stands out. We are not unique in this area, but we are unusual.”

Treasurer Scott Morrison today urged borrowers wanting a slice of the big capital gains dividends in housing markets such as Sydney and Melbourne to take greater care.

“Just because a bank says you can borrow doesn’t mean that you should,” Mr Morrison told ABC radio.

And I think that some times when people look at what the banks say they will loan to them they seem to think that is somehow a green light and they’ve given an assurance they can repay this.

“Individuals always have to make the ultimate choice about these things.”

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