RBA warns of potential losses in residential property lending

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Due to property oversupply and the rising numbers of foreign borrowers, the Reserve Bank of Australia warned banks of the possibility of large losses on lending to residential property developers.

According to data from the Foreign Investment Review Board, home loan approvals for all non-residents have increased of late, especially in New South Wales and Victoria. But though the numbers are high right now, an investment drop could potentially be detrimental to banks' property portfolio.

"The Australian banking system's direct exposure to Chinese property investors and developers appears to be small," RBA said in its latest Financial Stability Review. "However, if Chinese demand were to decline significantly, that could weigh on domestic property prices and so lead to losses on the banks' broader property-related exposures."

A reduction in housing demand could result from a number of sources, such as a sharp economic slowdown in China and a further tightening of capital controls by the Chinese authorities.

"Australian-owned banks also have tighter lending standards for non-residents than domestic borrowers such as lower maximum loan-to-valuation ratios, because it is harder to verify these borrowers' income and other details, and because the banks have less recourse to these borrowers' other assets should they default on the mortgage," the review noted.

This can also affect the apartment markets of inner city Melbourne and parts of Sydney as Chinese buyers are particularly prevalent in these areas. There is also an apartment oversupply in these areas, as well as the practice of buying-off-the-plan, which further increases the risk of price declines.

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