Higher rates 'dampening' housing finance - Reserve Bank

HOUSEHOLDS have benefited from improved economic conditions, but higher rates are hurting, RBA says.

HOUSEHOLDS have benefited from improved economic conditions but higher interest rates have had a dampening effect on housing finance, the Reserve Bank says.

In its half-yearly Financial Stability Review, the Reserve Bank said while households had been more cautious in their borrowing behaviour than before the global financial crisis (GFC), demand for housing credit noticeably strengthened in 2009.

"The household and business sectors in Australia are benefiting from improved economic conditions," the Reserve Bank said.

"While households have generally been more cautious in their borrowing behaviour than in the pre-crisis period, their demand for housing credit strengthened noticeably during 2009, and this has been associated with stronger growth in housing prices.

"However, higher interest rates have had a dampening effect on housing finance."

The current cash rate is four per cent after the RBA raised it from 3.75 per cent in early March.

The bank took the cash rate 25 basis points higher three times between October and December, from a 49-year low of three per cent to 3.75 per cent.

The central bank said business credit had begun to stabilised after a period of debt reduction in response to the GFC.

The Reserve Bank noted this had been "partly induced by tighter credit conditions, but it also reflected efforts by businesses to strengthen their balance sheets by raising additional equity and reducing debt".

But the bank also warned that market sentiment in major advanced economies remained fragile, while in the Asian region risks are emerging over rapid credit growth and rising asset prices.

"Confidence in financial markets has recently been affected by concerns about sovereign credit risk, particularly in Europe.

"Nonetheless, over the past six months, risk pricing in financial markets has generally moderated, and bank funding conditions have improved.

"In China, credit growth in the year to February 2010 was above average at 27 per cent, though it has slowed in recent months."