Low interest rates, strong institutional responses and rapidly improving economic conditions have been central factors supporting the rebound in housing markets.  With mortgage rates likely to remain at record lows well into 2022, housing values are expected to keep rising.

The RBA has previously acknowledged asset prices would appreciate in an environment of persistently low interest rates and create stronger household balance sheets, via improved housing wealth. This could help to offset risks in other areas of the economy, including a decline in private sector consumption and investment.  Based on the recent flow of data, those assumptions are looking well founded.

CoreLogic’s January home value index showed Australian housing values reached new record highs after rising 3.2% since September last year. Retail sales rose 13.3% year-on-year, and both consumer and business confidence are trending well above pre-COVID levels. 

It is likely the RBA will continue to look through the recent upwards trend in housing values, focusing more on targeting inflation, keeping the Australian dollar competitive, and ensuring credit remains cheap and available, especially for business lending. 

With housing prices expected to keep rising, attention will once again turn towards housing affordability.  Importantly, the most unaffordable markets, Sydney and Melbourne, are recording the mildest growth conditions. Meanwhile, it is the most affordable capital cities of Darwin and Perth, where housing values are rising the most rapidly.

If the RBA, along with other members of the Council of Financial Regulators (CFR), see financial stability risks emanating from the housing market, there are mechanisms other than monetary policy that would help to curtail risk.  Macroprudential levers proved to be effective previously when the CFR became concerned about investor and interest-only lending becoming over-represented in the market.  A new round of credit tightening would probably have the same effect in reducing credit availability in specific areas of risk.