Reserve Bank eyes housing market risks
The central bank has its eye on mortgage lending quality and surging house prices, but sees no reason to step in, its minutes revealed.
Surging Australian house prices are back on the radar of the Reserve Bank of Australia, but for the moment the central bank says it sees no reason to step in to quash the frenzy in the property market, arguing that record low interest rates are currently bolstering the stability of the financial system, not working to erode it.
“The board concluded that there were greater benefits for financial stability from a stronger economy, while acknowledging the importance of closely monitoring risks in asset markets,” the RBA said in minutes of its March 2 policy meetings.
The comments come as house prices have returned to record levels in Australia. Property research group CoreLogic said house prices jumped by their biggest monthly amount in 17 years through February.
The heating up of the property market has fuelled speculation among economists that financial regulators will take steps, potentially before the end of the year, to put clamps on mortgage lending with a goal of taking some steam out of the housing market.
Such measures were successful in cooling the house price boom that emerged when interest rates were cut to support the economy after the global financial crisis in 2008.
“The board acknowledged the risks inherent in investors searching for yield in a low interest rate environment, including risks linked to higher leverage and asset prices, particularly in the housing market,” the RBA said.
Uncontained, the jump in house prices threatens to force new entrants from the market as affordability strains. It could also stoke fresh concerns about soaring household debt in Australia, something that is often cited as a big risk factor for the economy.
The RBA said it has its eyes on the quality of mortgage lending.
“Lending standards remained sound and it is important that they remain so in an environment of rising housing prices and low interest rates,” it said.
The housing market has been fired up by sharp falls in mortgage interest rates and guidance from RBA Governor Philip Lowe that interest rates won’t be raised until 2024 at the earliest.
House hunters are also cashed up thanks to the wave of stimulus money that gushed into the economy in 2020 to fight off the economic downturn brought on by the COVID-19 pandemic.
The RBA has been trumpeting the view that it will take years before the economy is returned to full employment, which is needed to bring on the kind of wages growth required to lift inflation back to within the 2-3 per cent target band.
“The board will not increase the cash rate until actual inflation is sustainably within the 2-3 per cent target range. For this to occur, wages growth would need to be materially higher than it is currently,” the RBA said.
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