RBA chief Philip Lowe zeros in on red-hot property markets

With home prices growth surging to three-decade highs, financial regulators could be reaching for the control panel.

Reserve Bank governor Philip Lowe. Picture: Getty Images

The Reserve Bank has signalled it is zeroing in on risky lending after house price inflation last month hit its hottest rate in more than three decades.

Following the central bank’s first monthly board meeting since CoreLogic’s March house price index surged by 2.8 per cent, the fastest monthly growth since 1989, governor Philip Lowe said the RBA was “carefully” monitoring borrowing risks.

On Tuesday, the RBA left monetary policy unchanged, with the cash rate and yield on the three-year Australian government bond at 0.1 per cent, and the parameters of its term funding facility and bond purchase program remaining the same.

“Housing markets have strengthened further, with prices rising in most markets,” Dr Lowe said in a statement. “Housing cred­it growth to owner-occupiers has picked up, with strong demand from first-home buyers. In contrast, investor credit growth remains subdued.

“Given the environment of rising housing prices and low interest rates, the bank will be monitoring trends in housing borrowing carefully and it is important that lending standards are maintained.”

Commonwealth Bank’s head of Australian economics Gareth Aird said he believed the RBA was “surprised at just how strong growth in new lending and prices has been so far”. “Using the word ‘carefully’ is likely to be a subtle acknowledgment that things have heated up a lot more than they expected, and they will keep an eye on it,” Mr Aird said.

The RBA chief’s warning follows his watchful statement last month that “lending standards remain sound and it is important they remain so in an environment of rising housing prices and low interest rates”.

While the RBA maintains that it does not overtly target house ­prices, Dr Lowe has said if financiers abandoned their standards, regulators would step in with “macroprudential” measures, as they did in 2015 to curb investor debt. In 2017, officials tightened controls on interest-only loans.

The Council of Financial Regulators, which includes the RBA, Treasury, the Australian Prudential Regulation Authority and the Australian Securities & Investments Commission, said last month it would “continue to closely monitor developments and consider possible responses should lending standards deteriorate and financial risks increase”.

Mr Aird said he did not think conditions to reintroduce macroprudential regulation would be met this year. “Overall, credit growth is still low, lending standards are sound and interest-only lending is low as a share of overall lending when looking at the past decade,” he said.

“People are willing to pay a lot more for a home because interest rates have gone down to their lowest level ever — not a reason of itself for either the RBA or APRA to step in to cool the market.”

Home prices are 3.8 per cent higher now than they were at their previous peak in September 2017.

In his policy statement, Dr Lowe again noted the economic recovery in Australia was “well under way” and stronger than had been expected, with above-trend growth forecast this year and next.

Dr Lowe said the RBA board was committed to maintaining “highly supportive monetary conditions until its goals are achieved”, which included actual inflation within a 2-3 per cent target range. This would depend on “materially higher” wages growth that would come via significant job growth and a tight labour market.

“The board does not expect these conditions to be met until 2024 at the earliest,” he said.

Since the start of last year, the RBA’s balance sheet has increased by about $215bn.