CBA warns home owners over debt

Commonwealth Bank (ASX:CBA) chief Ian Narev has warned Australians about taking on too much debt, saying economic conditions are risky.

The comments follow real estate expert John McGrath’s warning that low rates could see a property bubble develop. Mr McGrath says the Sydney market is “hot, hot”, with auction clearance rates above 80% in the past three months. He says he hasn’t seen it this hot since the last real estate boom. Sydney property prices rose 7% in 2012-13, according to Australian Property Monitors, while nationally, median house prices in capital cities climbed 5.4% over the last financial year.

With the official cash rate cut to 2.5% by the Reserve bank earlier this month, all big four banks opted to pass on the full cut of 0.25% to home loan borrowers. Westpac Banking Corporation (ASX:WBC) even opted to pass on 0.28% to its customers.

CBA’s Narev says there is no imminent sign of a bubble, but the bank remains watchful as low interest rates prompt more borrowing. “There is no doubt that in a sustained low interest rate environment, you can get asset bubbles and that can carry over to the property market”, he said.

Commonwealth Bank has the biggest exposure to Australia’s residential market, with more than 25% market share. Mr Narev says taking on too much debt at current low rates could see some homeowners in trouble, once rates rise to their normal levels.

In an effort to take market share, National Australia Bank (ASX:NAB) is even offering to pay borrowers $1,000 to switch home loans from its rivals, including ANZ Bank (ASX:ANZ), as well as other inducements such as discounts on mortgage protection insurance, and no monthly fees on its transaction account.

Foolish takeaway

After a long period of low credit growth, the major banks could be seeing a return to more normal rates of growth, but they and the Reserve Bank will be watching closely for signs of bubbles in the property market.

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Motley Fool writer/analyst Mike King doesn’t own shares in any companies mentioned.

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