Despite exhortations from various media, ‘experts’ ‘analysts and others for the Reserve Bank ’to do something’ about rising house prices, the central bank still doesn’t seem to be all that concerned.
While the bank, in its first of two Financial Stability Reviews (FSR) of the year said it was keeping a close watch on housing that’s as strong as it concerns are. It in fact does not believe lending standards have slipped (as they have dome in past booms – the most recent in 2014-2016).
It says lending standards among banks and others active in the housing market “remain robust”.
There hasn’t been a significant increase in debt, investor credit, while rising, remains low and all in all the RBA seems to be on a watch and hold stance as it with monetary policy.
The report also repeated that the Council of Financial Regulators, which also includes the banking regulator, would continue to closely monitor the mortgage market and could respond if financial risks increase.
That’s not to say the bank isn’t concerned about what is happening in financial markets. – its concerns are wider, as it said in the FSR on Friday there is a global risk that a sustained period of rising asset prices could lead to “over-exuberance and extrapolative expectations” including increased used of debt. These risks were greater for leveraged assets, including houses, it pointed out.
“In an environment of accommodative financial conditions with rising asset prices it is particularly important that there is no excessive risk-taking by the financial sector,” the RBA said.
“Increased risk-taking could take the form of looser lending standards for individual loan assessments, or a relaxation of internal limits on the share of riskier loans they make.”
“Even if lenders do not weaken their own settings, increased risk-taking by optimistic borrowers could see a deterioration in the average quality of new lending. This would weaken the resilience of of businesses and households, and so the financial system, to future shocks.
And looking at the impact of the JobKeeper support, the RBA is worried that could see more problems for some businesses.
The RBA said more business insolvencies were likely after key government support schemes including JobKeeper recently ended.
“Vulnerable businesses may find it difficult to continue to operate and/or meet their debt repayments if their revenues do not increase sufficiently to cover the withdrawal of government support,” the RBA said.
It says banks were well positioned to deal with the likely increase in soured loans, it said, noting lenders had already lifted their provisions for bad debts by about 40% compared with recent years (most of that in 2020 when the banks boosted their capital bases by nearly $17 billion).
Despite this relaxed attitude analysts still think the RBA will do ’something’ a little down the track.
For instance the AMP’s chief economist, Shane Oliver wrote on Friday after the FSR was released that “Our view remains that booming prices are invariably a precursor to a loosening in lending standards and investor finance is now hotting up again telling us that the market is becoming more speculative and as such it would make sense for APRA and the RBA to start tapping the macro prudential brake soon. But at this stage its still looks like any move is several months away.”
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Too many analysts and others are watching this all unfold and ignoring the pressures emerging in the commercial retail property sector.
And for listed retail shopping mall owners and privately-controlled (by families or corporate investors and super funds) centres, the problems are not going to ease any time soon.
But despite these concerns, the sector will probably continue to survive these pressures because of their conservative balance sheets and lending by banks and other financiers.
In its first Financial Stability Review (FSR) of 2021, Reserve Bank warns that the pandemic, social distancing and the continuing rise of online competition is pressuring retail commercial property “already facing a challenging environment” before the pandemic broke.
“The margins of retailers, particularly bricks-and-mortar retailers for discretionary goods, were being compressed by intense competition from both large international and online retailers.
“With Australia having a relatively low share of online retailing relative to other advanced economies, it is likely this shift will continue to depress demand for retail properties,” the RBA warned in an article in the FSR.
“As demand for retail tenancies declined through 2020, retail vacancy rates increased sharply.
“They are likely to increase further with some department stores and large retailers announcing plans to further reduce the size of their floor space over the next couple of years. This will place further downward pressure on rents and valuations, which have declined by 6 and 15 per cent since early 2019 respectively,“ the RBA explained.
We have already seen a number of listed mall groups – Scentre, Vicinity, GPT, Stockland and Mirvac make writedowns of varying size in the book values of their malls because of the pandemic’s impact in 2020.
The key will be what happens in the coming year and whether these and other groups try to write back these reduced values as retailing steadies. But this year is likely to see a sharp slowing in sales growth compared to much of 2020 when some types of retailing saw explosive growth – food, liquor, hardware, consumer electronic and even department stores.
As well, the continuing growth of pure online retailers like Kogan, Catch (owned by Wesfarmers), Temple and Webster and travel groups like Webjet will drain sales from malls and standalone bricks and mortar operations.
“The outlook is particularly uncertain for regional and sub-regional shopping centres (those anchored by full-line or discount department stores anywhere in Australia, including in capital cities and CBDs),” the RBA warned.
“These centres rely on maintaining a breadth of tenants to sustain high levels of occupancy. Together these centres account for roughly two-thirds of gross lettable area of all shopping centres.
“In contrast, risks around earnings and profitability in ‘neighbourhood centres’, are somewhat lower.
“The anchor tenant in these centres are supermarkets, which have fared better during the pandemic. While vacancy rates in CBD shopping centres are very high, they account for only around 4 per cent of gross lettable area.”
And this is bad news for investors in retail commercial property:
“When vacancy rates increase and rents decline, indebted landlords need to use a larger share of their earnings to meet debt repayments. Although lower interest rates work to lower debt-servicing burdens, for a large enough decline in earnings some may find it difficult to service their debt.
“This raises the potential for asset fire sales, further depressing retail property prices. Large price falls would see a wider range of leveraged investors breach loan covenants, requiring a review of their situation with their lenders and possible further property sales,“ according to the RBA.
But risks remain low:
Historically in Australia and internationally, losses on commercial real estate (CRE) have accounted for a large share of banks’ losses in downturns. For this reason, lenders and financial regulators typically pay close attention to the exposure of the financial sector to CRE.
“The available information suggests that financial stability risks from retail CRE are currently lower than previous retail sector downturns,” the bank stated.
“This reflects that CRE lending has experienced only moderate growth over recent years and has been subject to conservative lending practices. Moreover, the largest landlords have maintained conservative balance sheets, which will position them well to cope with the challenges posed by weakening rental demand,” the bank concluded.
In fact the RBA said the financial positions of the larger listed retail landlords “remains sound.”
