Rates on hold amid increasing concern about house prices

The Reserve Bank of has held the cash rate steady at 1.5 per cent for the 12th consecutive month amid growing pressure for it to increase rates to contain soaring house prices.
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The futures market is pricing in no change in rates until late 2018, when there will be an increase.

In the year to March 31, Sydney home prices climbed 18.9 per cent, Melbourne prices 15.9 per cent and the average of capital city prices 12.9 per cent.

In the past week, both the n Prudential Regulation Authority and the n Securities and Investments Commission have announced tighter rules and increased supervision of banks’ lending to investors in an effort to contain the growth in lending to investors to 10 per cent.

In a statement released in Melbourne as the board meeting concluded, governor Philip Lowe said growth in household borrowing, largely to purchase property, continued “to outpace growth in household income”.

“By reinforcing strong lending standards, the recently announced supervisory measures should help address the risks associated with high and rising levels of indebtedness,” he said.

“Lenders need to ensure that the serviceability metrics that they use are appropriate for current conditions. A reduced reliance on interest-only housing loans in the n market would also be a positive development.

“Conditions in the housing market continue to vary considerably around the country. In some markets, conditions are strong and prices are rising briskly. In other markets, prices are declining. In the eastern capital cities, a considerable additional supply of apartments is scheduled to come on stream over the next couple of years. Growth in rents is the slowest for two decades.”

Dr Lowe is also expected to address the question of house prices on Monday night in an unusual televised address to an RBA board dinner in Melbourne.

CoreLogic head of research Tim Lawless the board was stuck “between a rock and hard place”.

“They aren’t likely to push rates higher just to quell housing market exuberance; doing so could push inflation lower and the n dollar higher as well as cancel out some of the much-needed stimulus that many sectors of the economy are benefiting from,” he said.

“On the other hand, the bank would be loath to push rates lower out of concern for adding further fuel to an already overheated housing market.”

Dr Lowe said the economy was continuing its transition following the end of the mining investment boom with recent data consistent with ongoing moderate economic growth.

“Most measures of business confidence are at, or above, average and non-mining business investment has risen over the past year,” he said.

“At the same time, some indicators of conditions in the labour market have softened recently. In particular, the unemployment rate has moved a little higher and employment growth is modest. The various forward-looking indicators still point to continued growth in employment over the period ahead. Wage growth remains slow.”

On the announcement, the n dollar slipped from US76.04?? to US75.80??

UBS economist George Tharenou said there was not enough change in the outlook to shift the RBA’s “neutral” stance.

“They see an improved global backdrop … and moderate domestic growth, which is now coupled by an elevated focus on household leverage,” he said in a note.

“However, the RBA has already shown a clear willingness to use further macro-prudential tightening, rather than the ‘blunt stick’ of rate hikes.

“Indeed, as inflation remains “quite low”, and the labour market “softened recently”, they are showing little near-term urgency (in contrast to prior cycles) to back away from a record low cash rate.”

ANZ Research’s Felicity Emmett said the RBA was clearly concerned about the risks from rising household debt, but its comments around domestic inflation and wage growth were little changed.

“On balance, we expect that the combination of persistently low inflation and strong house price growth is likely to keep the bank on hold for a prolonged period,” she wrote.

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