At today’s board meeting, the RBA held the cash rate target at 10 basis points and maintained the interest rate on Exchange Settled balances at zero percent. The Bank also held the target for the April 2024 Australian Government bond at 10 basis points, and reduced the weekly purchase of Government securities by $1 billion, to $4 billion a week.

While the decision to hold the cash rate at a record low of 0.1% was expected, the RBA’s strategy around other facets of monetary policy was less certain, especially the planned taper of its bond buying program scheduled for later this month. Despite a range of indicators showing weaker economic conditions, including looser labour markets and lower consumer sentiment, as lockdowns continue in NSW, VIC and ACT, the RBA announced it would progress with the planned taper of the quantitative easing program, reducing their purchasing of government bonds from $5 billion a week to $4 billion, but extending the program until at least mid-February 2022 rather than ‘at least mid-November 2021’ as stated last month.

Housing market conditions remain one of the few positive indicators over recent months, with CoreLogic continuing to report a rapid, although decelerating, rate of growth in housing values, along with above average levels of buyer activity. 

Nevertheless, ongoing strength in the housing market could indirectly indicate some future concern for the RBA and APRA, with housing credit growth remaining well above average and investors gradually comprising a larger component of mortgage demand. As they have in previous statements, the RBA notes they are ‘monitoring trends in housing borrowing carefully and it is important that lending standards are maintained.’

According to the RBA’s private sector credit aggregates, outstanding mortgage debt is rising at the fastest pace since 2010. Since March this year, monthly increases in housing credit growth have remained above the decade average — this persistently above average housing credit growth could trigger tighter credit policies. 

Offsetting this risk is the fact that owner occupiers are continuing to drive the most substantial component of growth in housing related credit. Growth in investor housing credit remains below average and has trended lower over the past two months.  

Additionally, investors are still under-represented in the housing market, comprising 29.1% of new mortgage demand, well below the decade average (35.1%). However, with new credit growth for housing investment substantially outpacing owner occupier lending, investor concentrations could lift to above average levels over coming months, increasing the risk of a regulatory response.

In the meantime, as housing values rise more in a month than average household incomes rise in a year, it’s likely that affordability constraints and increased supply will gradually slow buyer activity and price growth across the housing market, with the potential for a sharper slowdown if credit tightening policies or increases to interest rates are implemented.

Considering the weaker economic conditions and the RBA’s ongoing view that inflation won’t be high enough to trigger a lift in the cash rate until 2024, it’s likely mortgage rates will remain low for an extended period of time, continuing to keep a floor under housing demand.