A boom in lending for housing, led by low interest rates, is not expected to cause a sharp rise in bad debts when rates eventually pick up again, the Reserve Bank of Australia (RBA) says.

A sharp rise in arrears is not expected as household budgets are under less stress than those in other countries and the rise in Australian incomes since 2003 has outpaced the growth in consumption spending.

The RBA also says the ability of households to service their loans has improved, with the four per cent annual appreciation in house prices over the past five years dwarfed by the eight per cent annual growth in household disposable income over the same period.

The head of the RBA’s economic analysis department Anthony Richards said lending standards in Australia were “never relaxed” during the housing boom in the earlier part of this decade.

“No doubt, as at any time, some of the loans being written now will turn sour,” Dr Richards told the fourth annual Housing Congress in Sydney on Thursday.

“However, overall, I suspect that the risk of non-performing loans increasing to the extent in the United States is low.”

Dr Richards said lending standards had tightened over the past year and a half, with a “significant shrinkage in the amount of low-doc and non-conforming” loans.

The RBA cut the cash rate by four percentage point between September last year and February, with most of the reduction passed on by home lenders.

Dr Richards said standard variable housing rates had fallen by about 375 basis points.

The average of interest rates paid on all housing loans, including fixed rate loans, dropped about 265 basis points.

The federal government in October doubled the first home buyers grant to $14,000 for those buying an existing home and tripled it to $21,000 for those purchasing a new property or building their own home.

The temporary boost expires on June 30.

Dr Richards offered no direct comment on the direction of monetary policy.

But he noted that interest rates at some point would presumably be at more “normal levels” and advised those considering buying property to carefully consider whether they would be able to service their loans if their repayments rose.

Dr Richards said the fall in borrowing rates had reduced the debt servicing burden of households by five per cent of household disposable income.

“It is quite clear that purchase affordability has recently improved very significantly in Australia,” Dr Richards said.

Another factor that had helped improve affordability was a softening of the Australian housing market, he said.

Dr Richards said overall housing prices in Australia fell by about three per cent in 2008, which was much smaller than the double-digit falls in the US and UK.

Dr Richards said the big interest rate cuts and temporary boost to the first home buyers grant would support home building activity later in 2009.

He said he expected the recent weakness in building approvals to be “reflected in further falls in construction activity over the first half of this year”.

“The falls in interest rates and improvements in housing affordability that have occurred over the past six months have not really fed through into construction activity yet, but we can expect them to gradually boost home building,” Dr Richards said.

The slowdown in building approvals was most pronounced for apartments, Dr Richards said, which reflected difficulties in obtaining finance for firms in the property sector.

While Dr Richards acknowledged the housing market was “relatively tight” given the nationwide rental vacancy rate was about 1.5 per cent, he suspected the undersupply of housing might be “less than some of the estimates in the public domain”.