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Banks warned risky loans could fuel property -

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ELEANOR HALL: Australia's banking regulator has warned that the country's banks must tighten their lending standards, with record low interest rates threatening to create a property bubble.

The availability of cheap money and the election of a Coalition Government appear to have combined to push a key consumer sentiment survey to its highest level in three years.

Joining us now is business editor Peter Ryan.

So Peter, what evidence is there of a property market bubble?

PETER RYAN: Well Eleanor, property prices across Australia rose 4 per cent in the three months to the end of August. That's according to RP Data. And it's the biggest quarterly increase in more than three years.

And much of this action's been in Sydney and Perth. But even the Sydney real estate tycoon John McGrath has warned about a bubble in Sydney's inner city apartment market. And that's quite a statement from a real estate agent.

But on the other hand, annual growth in the home loan market is at its lowest point in 30 years. So the regulator APRA is concerned that some banks might begin to relax their lending standards. For example issuing loans with 80 per cent or more of the property's actual value.

And we saw this; sometimes loans go into 90 or even 100 per cent of their value in the last decade.

So in its latest newsletter, APRA has warned banks to ensure that customers are able to service their debt when interest rates inevitably start rising from the current level of 2.5 per cent - which is the lowest point in more than 50 years.

ELEANOR HALL: And Peter, have the major banks responded to these concerns being expressed by the banking regulator?

PETER RYAN: Well the Australian Bankers Association which represents the big four banks says growth in loans remains "modest" and lenders do abide by quite strict rules to ensure loans can be repaid.

But the concerns about unsustainable prices, rising interest rates, a rising unemployment rate and potential loan defaults in a softening economy are ever present as banks try to manage their loan books.

And the Commonwealth Bank's Chief Executive Ian Narev admitted that he was alert but not alarmed about a bubble when I spoke with him last month.

IAN NAREV: When interest rates are at a sustained low level they can lead to asset bubbles. I'm extremely confident that we've got a governor and a board at the Reserve Bank who understand the risks of a low interest rate environment, are watching it closely.

We certainly are not acting exuberantly. We're very clear that in our servicing test that we apply to make sure somebody can service their loan, we assume that interest rates are going to go up significantly and make sure they can still comfortably service the loan.

ELEANOR HALL: That's the Chief Executive of the Commonwealth Bank, Ian Narev, speaking to Peter Ryan.

Now Peter, is there any real prospect then that the regulators might intervene?

PETER RYAN: Well in its most recent Financial Stability Review, the Reserve Bank appears to be comfortable about bank lending standards at the moment.

But you just have to look across the Tasman, where the Reserve Bank of New Zealand, a short while ago, intervened in what has become an emerging property bubble in New Zealand.

So, it's tightening lending rules so only 10 per cent of loans can be for 80 per cent or above of agreed valuations.

Now the prospect of that is unlikely to happen to here at least in the short term. But there's no doubt that regulators really have the prospect of a bubble on their collective radars.

ELEANOR HALL: And it seems that access to cheap loans has the added impact of pushing consumer confidence higher. What does the latest survey reveal?

PETER RYAN: Well this is from the closely watched survey by Westpac and the Melbourne Institute. And it shows that low interest rates and also the election of a Coalition Government have combined to put confidence back at its highest level since December 2010.

And this result out today is being compared with the Coalition's last victory back in 1996 when it came back with John Howard as prime minister after 13 years in opposition.

Now this survey for September was mostly conducted last week before the election. But according to Westpac's Chief Economist Bill Evans, the 4.7 per cent lift can be put down to expectations for a change of government.

BILL EVANS: The result I think reflects an expectation of a Coalition victory. And we saw that for instance in the confidence of Coalition voters that jumped 19.1 per cent, compared to a 10 per cent fall in ALP voters.

So I think that does indicate that the election result was pretty much embedded in the results of this survey.

ELEANOR HALL: That's Westpac's Chief Economist Bill Evans. And just very briefly, Peter, how is the Australian dollar reacting to all of this?

PETER RYAN: The Australian dollar has hit its three month high earlier today at 93.1 US cents. And this is mainly because, not just because of local factors, but investors are becoming much more confident about the recovery of the global economy.

ELEANOR HALL: Peter Ryan, our business editor, thank you.