At today’s monthly board meeting, the RBA held the official cash rate at 0.1%. Additionally, the RBA’s Term Funding Facility (TFF), which has been providing additional support for low mortgage rates, expired at the end of last month. With the expiry we could see additional upwards pressure on longer term fixed mortgage rates as lenders seek out alternative funding sources.
The firm policy stance comes amidst a flow of economic data that has been more positive than expected, with economic activity now above pre-COVID levels, labour markets tightening and retail spending well above average. Australia’s unemployment rate and underemployment rate have trended below the decade average, despite the participation rate being around record highs, and the number of Australians with a job is above pre-COVID levels.
Although the RBA only mentions housing investment briefly in their statement following the board meeting, there is likely to be additional focus on the lift in investor credit growth, with the RBA and APRA potentially viewing the increased participation of investors as a lift in speculative activity. Investor credit has been rising across two key measures; financial aggregates from the RBA show investor credit growth has been rising at an above average rate over April and May, while lending indicators published by the ABS show the value of investor lending has surged by almost 70% over the six months to May which is more than double the rate of owner occupier credit growth. Investors are still a smaller than normal share of mortgage demand, comprising 28% of mortgage activity by value compared with a 10yr average of 35%, however at this rate of growth, investor concentrations could lift to above average levels over coming months, increasing the risk of a regulatory response.
From a housing market perspective, home values have continued to rise at a rate that is substantially above average through June, although the rate of growth has eased a little from the recent peak in March. Growth conditions remain broad-based, with the large majority of regions around the country recording higher housing prices. Although low interest rates are a key factor supporting housing demand, the RBA has been sanguine on the surge in housing prices, previously noting the skew towards owner occupier activity over investment as well as the positive flow through of higher housing prices to household wealth and spending. However, with new lending to investors now rising at a substantially faster pace than for owner occupiers, the RBA may be less comfortable with housing market conditions and the potential for financial instability relating to a lift in housing related debt and a worsening dwelling value to income ratio.
Arguably, the most significant headwind facing housing markets, apart from further COVID outbreaks and associated lockdowns, remain tighter credit policies and higher mortgage rates. Neither of these events look to be imminent at the moment, with the RBA maintaining a central scenario that inflation won’t be high enough to trigger a cash rate rise until 2024. A growing number of private sector commentators are forecasting the cash rate will lift earlier than this, potentially as early as late 2022.
From a credit policy perspective, a more substantial rise in investor activity, a further rise in household debt or any material slip in lending standards could be the trigger for tighter credit policies. The RBA has again noted they will be monitoring trends in housing borrowing carefully to ensure lending standards are being maintained.
In the meantime, as housing values rise more in a month than household incomes are rising in a year, it’s likely that affordability constraints and higher supply will gradually slow activity and price growth across the housing market. If credit tightening policies are implemented, or interest rates shift higher, there will be a potentially sharper slowdown.