The federal government has conceded that it is keeping a close eye on the residential property market amid growing concerns over household debt levels and a drop-off in demand from Chinese buyers.
In a keynote speech at the Stockbrokers and Financial Advisers Conference in Sydney this week, secretary to the treasury John Fraser noted that household debt has increased more quickly than incomes in recent years.
The issue was also raised by RBA governor Philip Lowe in a speech earlier this month. The banking regulator is now looking to gather information from banks on the debt-to-income ratios of borrowers.
“Household debt needs to be watched and current low interest rates should not blind us to long-term debt servicing obligations,” Mr Fraser said this week. “Treasury and the regulators are watching the housing market closely.”
Mr Fraser also highlighted international risks to the Australian economy, namely a reduction in Chinese real estate investment as a direct consequence of China’s efforts to stymie capital outflows. He added that China’s recent growth has been supported by “higher credit intensity”.
“Chinese authorities are clearly aware of the risks attached to this and probably now even more in light of Moody’s downgrade.
“They are now implementing measures to maintain stability and this has included measures to reduce the outflow of capital from China.
“In turn, this has contributed to a softening of Chinese investment in Australian residential real estate since late 2016 – although interest in business investment remains strong but, even here, we are seeing the impact of tighter credit availability.”
The number of all foreign investment applications for residential housing has fallen from 40,000 in 2015 16 to 15,000 in 2016 17.
Chinese investment has often been cited as an inflationary driver on domestic housing markets. However, last year the Reserve Bank warned of what could happen to property prices and bank balance sheets if the strength of Chinese demand were to wane.
On Wednesday Moody’s lowered China’s credit rating to A1 from Aa3 on the expectation that China's financial strength will "erode somewhat over the coming years".
The downgrade, which is the first for China since 1989, was quickly dismissed by the government's finance ministry.
[Related: High household debt risky for banks: Moody's]