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RBA: Lax loan standards are fueling property downturn risks

Melbourne, Australia.
Getty Images
Melbourne, Australia.

Australia's central bank on Friday warned lending standards for home loans had been looser than first thought, adding to the risks of an eventual downturn in the housing market.

The Reserve Bank of Australia (RBA) said the recent tightening of standards by regulators seemed to be leading to a welcome slowdown in investor demand anda cooling in the red hot markets of Sydney and Melbourne.

Yet it emphasised that banks were on notice to keep their standards "permanently" strong across both the residential and commercial sectors.

"The risks surrounding housing and mortgage markets seem higher than average at present," the central bank said in its semi-annual Financial Stability Review.

"These risks do appear to be comfortably manageable at this stage, but they underscore the need to maintain sound lending standards."

The risk of overstimulating the housing and property sectors is a major reason the central bank has been reluctant to cut interest rates further from already record lows of 2 percent.

Indeed, much of Friday's 66-page report was about "risks" in everything from mortgages to commercial loans and overbuilding in the apartment and office sectors.

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In particular, investigations by regulators had found bank lending standards for some home loans had been looser than first thought, adding urgency to steps to tighten the rules.

The RBA said there were tentative signs these measures were having the desired effect of slowing investment lending, though some banks might still have to do more to meet the stricter standards.

It also saw signs of a cooling in sentiment in the Sydney and Melbourne housing markets, where home price growth has been by far the strongest.