A knee-jerk reaction from the Reserve Bank to try and cool rising house prices could be “disastrous” for the economy, says one broker industry figure.
The
RBA kept the cash rate on hold at 2.5% at its September board meeting, but there is speculation that the Central Bank might start to increase interest rates as early as next month to prevent the property market from over-cooking.
The Reserve Bank governor, Glenn Stevens recently expressed concerns that the low-rate environment might be at risk of creating a housing bubble.
“In our efforts to stimulate growth in the real economy, we don't want to foster too much build-up of risk in the financial sector, such that people are over-extended. That could leave the economy exposed to nasty shocks in the future,” he said.
However, 1300HomeLoan managing director John Kolenda said it could be a major mistake by the RBA to react prematurely on house price rises, which are mainly occurring in the Sydney property market.
“We have consistently warned about the potential detrimental impact of the RBA lifting its cash rate prematurely in response to factors such as house prices, which are in a two speed market,” Kolenda said.
Kolenda said an early move to hike the cash rate could cause burgeoning consumer confidence to collapse.
“Creating a more confident consumer climate required numerous rate decreases over the past few years and pulling the trigger too early could have disastrous consequences. We could easily see the positive gains in consumer confidence quickly evaporate and the overall economy slowdown in the lead up to Christmas. The RBA hasn't lifted its cash rate since November, 2010, and we believe the lower interest rate strategy has helped to restore some confidence among consumers in challenging economic times highlighted by patchy retail spending and a soft jobs market.”
