RBA admits low interest rates will boost cost of housing

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February 17 2021
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The RBA has confirmed that it is closely monitoring the impact of low interest rates on the level of housing loan commitments and acknowledged the “inherent” risk of soaring asset prices in the housing market.

The housing market has been touted for its resilience, the minutes from the RBA’s February board meeting revealed, with the bank acknowledging the market’s key role in the country’s economic recovery.

Noting that the market’s resilience has been better than expected, the RBA said: “Housing prices had recently been rising across most of Australia following an earlier period where conditions had been quite variable. This had returned the national housing price index to levels reached around four years earlier.”

But despite finding that house prices are soaring across the regions and some smaller capital cities, the bank acknowledged that there are few signs of deterioration in lending standards.

“Members noted that there were few signs of a deterioration in lending standards; however, lending standards would be monitored closely in the period ahead.”

The members did, however, concede that loan commitments had continued to pick up over preceding months.

“New housing loan commitments for owner-occupiers had increased to be well above the previous high in 2017. Investor housing loan commitments had also increased somewhat, but remained well below earlier peaks.”

The central bank also acknowledged the issues economists have been flagging for months, noting that cheap credit is linked to higher asset prices, particularly in the housing market.

However, the RBA board underlined “there were greater benefits for financial stability from a stronger economy”.

Earlier this month, RBA governor Phillip Lowe said the Reserve Bank is not responsible for targeting house prices, after questions were raised about the creation of a raging bull market against the backdrop of low interest rates.

Instead, Mr Lowe confirmed that bank would focus on the borrowing.

“What we can have influence on is how much borrowing happens on the back of those rising prices,” he explained at the time.

The central bank has previously stated that low interest rates could see a 30 per cent increase in property prices over the next three years, with industry experts stating it will materialise over 75 per cent of Australian regions.

“With what we can see today based on recent shifts in inventory levels, we would be comfortable in saying the RBA forecast will apply in 75 per cent of regions,” self-proclaimed data nerds Arjun Paliwal and Kent Lardner told nestegg’s sister brand Smart Property Investment.

Cheap money to drive inequality

Housing experts and economists are concerned that the Treasury’s ongoing dependence on “cheap money” policy will further ratchet up house price and widen the gap between rich and poor.

A UNSW Future Centre study, commissioned by the Housing Productivity Research Consortium, found that 84 per cent of the surveyed 47 leading economists and 40 senior experts from government, industry and academia agreed that Australian governments have paid too little attention to how housing outcomes affect productivity and growth.

The research, led by honorary professor Duncan Maclennan, further found that 80 per cent of experts and economists see rising mortgage debt as a risk to the Australian economic stability.

About the author

Cameron is a journalist for Momentum Media's nestegg and Smart Property Investment. He enjoys giving Aussies practical financial tips and tricks to help grow their wealth and achieve financial independence. As a self-confessed finance nerd, Cameron enjoys chatting with industry experts and commentators to leverage their insights to grow your portfolio.

About the author

Cameron is a journalist for Momentum Media's nestegg and Smart Property Investment. He enjoys giving Aussies practical financial tips and tricks to help grow their wealth and achieve financial independence. As a self-confessed finance nerd, Cameron enjoys chatting with industry experts and commentators to leverage their insights to grow your portfolio.

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