With the cash rate likely to remain on hold for an extended period of time, attention is more focussed on other elements of the RBA’s monetary policy settings and their perspective on the economy, including housing market conditions.
The RBA has been unwavering on their position for the cash rate and three year Australian government bond yield target (both set at 0.1%), the Term Funding Facility continues to ensure low cost credit is available for lending to businesses and households and the QE program, which was extended last month by a further $100 billion, is also supporting an expectation that funding costs will remain low, at least over the short-to-medium-term. Arguably, the coming months will be a critical assessment period for the RBA, as the economy emerges from the umbrella of fiscal support.
While we could see a temporary reversal in labour market tightening due to the end of JobKeeper, persistently low interest rates and momentum in Australia’s economic recovery should support further improvements in the labour market in 2021. An unemployment rate low enough to create wages pressures and a stronger trend in inflation is still likely to be several years away though, providing the justification for the stable cash rate outlook.
From a housing market perspective, low mortgage rates, improving economic conditions and a confident consumer sector has seen housing market activity surge over the past six months, driving housing values 8.2% higher between the end of September last year and March this year. The March Home Value Index release from CoreLogic was showing the fastest pace of capital gains in 32 years.
Through previous housing cycles, the factors that generally slowed the housing market were either rising interest rates, worsening economic conditions or tighter credit conditions. Looking at each of these factors, we aren’t expecting a lift in short term mortgage rates any time soon, and the economy has some positive momentum, so the most likely factor that will slow housing conditions is a new round of credit tightening along with housing affordability becoming more of a challenge, especially for first home buyers.
While a new round of macroprudential policies is looking increasingly a matter of when not if, the catalyst for such a policy intervention is more likely to be based on a worsening in the quality of lending standards or increase in mortgage related household debt, rather than as a response to heat in the housing market. Tighter credit conditions would probably have an immediate dampening effect on housing market activity, while continuing to let record low interest rates support the ongoing economic recovery.