Given the heightened level of uncertainty from recent COVID outbreaks and subsequent lockdowns, the RBA has acknowledged Australia’s economy is likely to move into reverse through the September quarter, along with an increase in unemployment. However, this interruption to the economic recovery wasn’t enough to cause a change in monetary policy, with the RBA keeping the cash rate on hold at 0.1%, maintaining their 10-basis point target for Government bonds and holding firm on their intention to taper the bond purchasing program from $5 billion each week to $4 billion in early September.
The RBA is expecting the disruption to Australia’s economic activity and labour markets to be a temporary phenomenon, noting the experience to date has been that economic conditions bounce back quickly once the outbreaks are contained and restrictions are lifted. Clearly the RBA believes the Australian economy had enough momentum heading into the most recent outbreaks that growth conditions will return once lockdowns are lifted.
The RBA also kept their outlook for the cash rate firm, with an expectation that the inflation target won’t be met until 2024 at the earliest. A growing number of economic commentators are forecasting the cash rate could rise earlier than this, but either way, the cash rate is set to remain at 0.1% for some time yet, ensuring variable and short-term fixed mortgage rates remain around record lows.
With interest rates remaining on hold for the foreseeable future, we can expect such a low cost of debt to continue supporting housing demand. While low rates have clearly been a key factor in stimulating housing demand, worsening affordability is tempering demand. With housing values rising substantially faster than incomes, it’s taking prospective buyers longer to save for a deposit and a larger portion of their income is required to fund their transactional costs.
It’s likely that worsening home affordability is behind the gradual slowdown in housing value growth rates; yesterday CoreLogic reported housing values increased by 1.6% nationally in July, down from the Mach 2021 peak of 2.8% growth.
Outside of monetary policy, there remains a level of speculation that credit policies could be tightened down the track. The RBA has again reiterated they will be monitoring home lending standards for any slippage in credit quality. A material lift in low deposit home lending or substantial rise in loans with high debt-to-income ratios could be the trigger for a new round of credit tightening aimed at keeping a lid on household debt.
To-date the messaging from regulators and policy makers has been that lending standards are being maintained, but if the quality of home lending does reduce we could see it become harder to secure a home loan, especially for borrowers with small deposits or high debt levels relative to their income. From pervious instances for credit tightening, we know that this would probably have a more pronounced effect in dampening housing market conditions.
In the meantime, we expect housing markets to remain positive. Advertised supply is around record lows and housing demand will continue to be supported by low interest rates. The rate of growth in housing values is likely to taper through the second half of 2021 and into 2022 due to housing affordability becoming more of a challenge, as well as higher levels of new supply gradually being added to the market against a backdrop of low population growth.
CoreLogic Australia