Low cash rate poses substantial housing risk: OECD

December 13 2016
Share

Historically low rates continue to threaten the Australian economy, fuelling accelerating house prices, and in turn weakening demand and construction activity, according to the Organisation for Economic Co-operation and Development.

Low cash rate poses substantial housing risk: OECD

In an economic forecast, the OECD says the cash rate should begin rising from next year to offset risks that have been building in the housing market.

“Monetary policy tightening is expected to commence towards the end of 2017 and this is appropriate given likely monetary policy developments elsewhere, the cyclical development of the domestic economy and the need to unwind tensions from the low-interest environment, notably in the housing market, which has in many places experienced rising prices for some time,” the OECD said.

“The government envisages fiscal consolidation. In the event of disappointing growth, however, fiscal rather than monetary support should play the leading role given the housing market concerns and fiscal leeway. Tax reform should be a core element of structural policy.”

The OECD noted that while Australia has experienced 25 years without recession, “there are risks looking forward”.

“Domestically, non-resource investment may remain lacklustre, damping growth prospects. Also, the housing market remains a risk, as an acceleration in price adjustment would weaken consumption demand and construction activity,” it said.

While low interest rates are likely to only fuel housing risks, it is unlikely Australia will see further cuts, according to the OECD, which projects the cash rate to remain at 1.50 per cent for most of next year.

“No further easing is projected and rate increases are projected to begin towards the end of 2017 as spare capacity fades.

“Despite the employment of macro-prudential measures to cool the housing market, the net gain from monetary easing has narrowed. Significant housing market concerns remain and there is growing discord between financial market developments and rest of the economy due to the low interest rate environment.”

After repeated warnings from the RBA and APRA about risks in the housing market, a number of economists believe further lending curbs could be on the cards.

Speaking at the Connective Level Up conference in the NSW Hunter Valley last month, CBA economist Savanth Sebastian said the last two speeches given by new RBA governor Philip Lowe made it clear that the central bank is not keen on cutting the cash rate any further.

In Mr Lowe’s November speech, he warned it was unlikely to be in the public interest “to encourage a noticeable rise in household indebtedness”.

Mr Sebastian said housing has been off the Reserve Bank’s “wall of worry” for a while, but recent speeches and the latest RBA board meeting show it is now firmly back on the table. He added that the Reserve Bank is a good lead indicator when it comes to regulatory measures.

“In the last board meeting, they started discussing housing once again. They started bringing up concerns around the potential issues of oversupply and that lift in investor loans,” he said.

“So housing is back in the discussion. Wait and see, but I certainly think the regulators will have a look very closely once again at that end of the spectrum.”

sections

sections

sections

sections

sections

sections

sections

Invest