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The Council of Financial Regulators (CFR), in its second quarter statement for 2019, has warned that falling house prices could affect lending to small businesses in Australia.

Most small business owners are dependent on residential property to serve as their collateral.

Around $110 billion in total outstanding small business loans are secured against apartments and houses. The CFR plans to monitor small business lending and calls on banks to maintain credit supply for this sector.

According to the CFR, business and personal finances are intermingled for many small business owners and as such high standards applied to personal loans affect some applications for small business loans. The good news is that the falling house prices do not pose a threat to the greater economy and that the slowdown in residential lending is largely caused by the reduced interest in borrowing and a stricter evaluation of borrowers’ finances.

According to Kieran Davies of National Australia Bank, monetary policy is the first line of defense against economic slowdown and regulators may need to change their policy settings if lending continues to remain weak.