'Build-up of risks': RBA warning over Aussie housing

Australia’s central bank highlighted threats in the property market and an acceleration of domestic household debt even as it lent credence to the global reflation story.

“Data continued to suggest that there had been a build-up of risks associated with the housing market,” the Reserve Bank of Australia said in minutes released Tuesday of this month’s meeting where it held interest rates at a record-low 1.5 percent. “Growth in household debt had been faster than that in household income.”

The RBA’s warning comes as the economic divide in Australia sharpens with house prices more than doubling in Sydney since 2009 and Melbourne’s similarly surging as investors tap cheap money. Meanwhile in the west, the heart of an unwinding mining-investment boom, property prices are falling and businesses are going bust as demand is weak.

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The Australian dollar was little changed after the report, buying 77.28 U.S. cents at 12:33 p.m. in Sydney.

Government data Tuesday showed Australian house prices rose 4.1 percent in the fourth quarter of last year, from the previous three months. That’s the highest quarterly increase since mid-2015. The central bank has been willing to tolerate inflation below its target to avoid adding rate fuel to east coast property markets, aided by economic growth forecast to accelerate to 3 percent this year and unemployment holding below 6 percent.

But in the intervening period between the March 7 meeting and today’s release, the jobless rate jumped to 5.9 percent from 5.7 percent, while policy makers were already concerned about the real strength of the labor market

“It was clear that spare capacity remained and there continued to be significant differences in labor market outcomes across the country,” the RBA said, again referencing the economic divide. “Domestic wage pressures remained subdued and household income growth had been low, which, if it were to persist, would have implications for consumption growth and the risks posed by the level of household debt.”

That debt currently stands at a record 187 percent of income.

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“The Board has upped its rhetoric around the build‑up of risks,” said Gareth Aird, senior economist at Commonwealth Bank of Australia. Tuesday’s comments “could be interpreted as the Bank calling on APRA to further place restrictions on lending to investors. In other words, watch this space.”

The RBA also noted the unusual correlation of growth and inflation worldwide as the U.S. and Chinese economies remain strong and even Japan and Europe grow faster than their traditional speed limits.

“Growth in global industrial production and merchandise trade had picked up further and survey measures of business conditions had remained at high levels,” it said. “Headline inflation in the major advanced economies had increased noticeably in recent months, largely as a result of higher oil prices, to be close to most central banks’ targets. However, core inflation had generally remained low.”

Also read: Will house prices collapse?

Trump, Trade

In comments on trade, the central bank made a thinly veiled reference to the Trump administration.

“Members noted that the volume of trade destined for the United States had fallen significantly as a share of total global trade since the late 1990s,” the RBA said. “Nevertheless, a move to more protectionist policies would still be damaging for the medium-term outlook for both the U.S. and global economies.”

In sum then, the RBA left rates unchanged as it has since Governor Philip Lowe took the chair in September, saying policy “would be consistent with sustainable growth in the economy and achieving the inflation target over time.”