Reserve Bank holds interest rate at 1.5% and warns of debt in housing market

Bank says maintaining rates is supported by positive business confidence, but voices concern that borrowing in housing market continues to outpace household incomes

The Reserve Bank has held its benchmark interest rate at 1.5% while voicing concern over debt levels in Australia’s housing market.

The RBA says maintaining rates at their current level is supported by positive business confidence levels and indicators of growth in employment, despite an increase in the jobless rate and modest growth in jobs numbers.

On housing the RBA says borrowing continues to outpace household incomes, and while recent regulatory changes should address “risks associated with high and rising levels of indebtedness”, the bank said less reliance on interest-only mortgages “would also be a positive development”.

RBA governor Philip Lowe is concerned soaring housing prices are pushing up the household debt to income ratio – which he said was at already at a record high earlier this year.

Lowe applauded recent moves regulatory moves to cool the housing market: the Australian Prudential Regulation Authority has limited interest-only loans to 30% of new mortgage lending and the Australian Securities and Investment Commission will monitor lenders and mortgage brokers recommending those loans to customers who can’t afford them.

In the RBA’s most strongly-worded statement on the mortgage market in recent memory, Dr Lowe implored lenders to do their part to help maintain financial stability.

“Lenders need to ensure that the serviceability metrics that they use are appropriate for current conditions,” he said.

The central bank boss also flagged that he believed a reduced reliance on interest-only housing loans in the Australian market would “be a positive development”.

Tim Lawless from CoreLogic said the RBA was stuck “between a rock and hard place” on interest rates.

“They aren’t likely to push rates higher just to quell housing market exuberance; doing so could push inflation lower and the Australian dollar higher as well as cancel out some of the much-needed stimulus that many sectors of the economy are benefitting from.

“On the other hand, the RBA would be loath to push rates lower out of concern for adding further fuel to an already overheated housing market.

“With the cash rate likely to remain on hold, at least for the remainder of the year, it’s looking increasingly like other factors will be necessary to ... bring about a housing market slowdown.”

Lawless said a combination of higher mortgage rates, as well as firmer policy settings from the Australian Prudential Regulation Authority around investment lending, more scrutiny from Asic on lending behaviour as well as market-driven factors, such as record low rental yields and affordability constraints, should gradually contribute to slower housing market conditions.

JP Morgan economist Sally Auld said the RBA issued the warning because any interest rate hike could curtail household spending, which currently is propping up patchy economic growth.

Since the RBA’s last monthly meeting, fresh data also showed that in February unemployment worryingly ticked up to 5.9% and retail spending had fallen by 0.1%.

Auld said it seemed like the central bank’s assertion that the economy would achieve 3% growth over the next two years was no longer the key message.

“Indeed, the three per cent forecast was removed from the March RBA Statement, and today’s comment on growth was limited to the observation that ‘Recent data are consistent with ongoing moderate growth’,” she said.

Commonwealth Bank economist Gareth Aird said the RBA remains unlikely to tamper with interest rates as it tries to balance financial stability with sustainable growth.

“The competing forces of below target inflation and soft employment growth against rampant property markets in Sydney and Melbourne mean policy is on hold for the foreseeable future,” he said.

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