The housing trend the RBA has on watch

by Madison Utley12 Sep 2019

The steep increase in housing values evidenced in Australia’s two largest cities in August has been widely celebrated, and likely influenced the Reserve Bank of Australia’s (RBA) decision to hold the cash rate at 1.0% in September. However, the possibility of a dramatic market rebound rather than the slow and steady climb previously expected could lead to a new round of credit tightening. 

“Clearly housing market conditions are responding to lower interest rates as well as the recent loosening of loan serviceability rules from APRA and the positive influence of the stable federal election outcome,” said Tim Lawless, CoreLogic research director. 

“The recent step up in the pace of value growth is likely to raise some concern that the lowest mortgage rates since the 1950s is fuelling renewed housing market exuberance at a time when household debt remains around record highs.”

The growth in new mortgages in July was the strongest since October 2014, and seems likely to surge yet further as the lag between loan applications and final approval means the full effects of the two RBA rate cuts have yet to be felt. 

“High levels of household debt are manageable while interest rates are very low. However, if debt levels remain elevated when interest rates eventually rise, the risk is that households will need to dedicate more of their income towards servicing their debt and less towards spending,” explained Lawless. 

“The recovery trend is still very early and there is the potential for the pace of growth to slow as advertised stock levels rise in line with spring, but no doubt the RBA will be keeping a close eye on housing market conditions.”

While many have been eagerly awaiting the turnaround of the property market, Lawless warned that a faster recovery than expected could move currently serviceable borrowers out of reach of credit in the future. 

“If the recent acceleration in housing value growth is sustained over coming months, we could potentially see additional credit policy levers pulled, aimed at keeping a lid on household debt,” he said. 

“Limiting lending to borrowers on high debt to income ratios could be one option, or introducing hard limits on high LVR lending could be another mechanism that would reduce the risk of a further build up in household debt.”