Reserve Bank worried about rising home prices

The RBA has kept the door open to more rate cuts but says the recent rise in house prices needs close scrutiny.

Reserve Bank governor Philip Lowe. Picture: David Moir

The Reserve Bank of Australia is keeping the door open to cutting interest rates further but signals that it is increasingly uneasy about the recent jump in house prices, saying the situation requires close scrutiny.

In the minutes of its October 1 policy meeting, the board of the RBA said it “was prepared to ease monetary policy further if needed” to support growth and job creation.

The RBA cut its official cash rate to a record low 0.75 per cent from 1.0 per cent on October 1 in its third cut so far this year.

Still, the central bank indicated its rising concern that lower interest rates might fan a renewed surge in housing prices. While it takes some comfort in the fact that housing lending growth remains weak, it is monitoring the situation more closely.

“This assessment would need to be reviewed if rapidly increasing asset prices were accompanied by materially faster credit growth...Members assessed that close monitoring of this risk was warranted,” the RBA said.

Investors return to housing

Since the central bank started cutting interest rates in June, house prices have strengthened, with the major capital cities of Sydney and Melbourne leading the charge. The gains snapped a near two-year fall in house prices, while weekend property auctions have been well bid over recent months, with mortgage finance for property investors gathering momentum.

Sharply rising house prices are a worry for an RBA already fearful that record household debt and years of weak wage growth could further slow an economy that recorded its slowest pace of growth in a decade in the year to June 30.

A further cut in official interest rates would also encourage speculation that the RBA is set to roll out alternative policy measures in 2020, starting with government bond purchases.

The RBA board considered preserving some policy ammunition to help fight off future shocks to the economy, but ultimately rejected the view, saying the level of interest rates--not the direction--mattered most.

By cutting now, “the board could reduce the likelihood of a negative shock leading outcomes that materially undershot the bank’s goals by strengthening the starting point for the economy,” the minutes said.

Dow Jones Newswires