The Reserve Bank of Australia has kept the official interest rate on hold at 0.1 per cent amid rocketing house prices.
The decision comes a day after new housing data reveals home values across Australia surged 2.1 per cent over February - the highest monthly increase in 17 years, prompting concerns that the market could overheat.
Home loans also increased 10.5 per cent over January to $29 billion, taking them 44.3 per cent higher than at that time in 2020.
While the RBA has previously said it won’t increase interest rates until actual inflation is between the 2 to 3 per cent range - a goal it expects it won’t hit until 2024 - the housing price surge and broader economic recovery could force its hand sooner.
"While the economy has recovered faster than expected, the RBA is still a long way away from meeting its inflation and employment goals so a rate hike is still a long way away,” AMP Capital chief economist Shane Oliver told the Finder interest rate panel.
“That said the faster than expected recovery will likely see the first hike occur earlier than the RBA's expectation of no increase before 2024. It could come late next year or early 2023."
The bank could be forced to move earlier, Bankwest Curtin Economics Centre’s Rebecca Cassells added, suggesting an increase in the second half of 2022.
“Whether this activity will be enough to reach the 2 per cent inflation threshold will remain to be seen, but it’s certainly more likely now than it was a month ago,” Cassells said.
Lending laws in the spotlight
With Australian households holding billions of dollars in debt, economists are split on the role of responsible lending laws.
The Government recently proposed loosening responsible lending laws in a bid to supercharge the COVID recovery. The changes would remove lenders’ obligation to ensure home loans issued are suitable for borrowers, placing that responsibility more squarely on borrowers’ shoulders.
The laws were first introduced in the wake of the Global Financial Crisis.
Half of the experts on Finder’s interest rate panel believe watering down the lending laws will pose problems for Australian borrowers, and the broader economy.
“There is an implicit assumption forming that property prices won't fall and it is fine to gear up. Same as 2008, and many previous speculative bubbles,” Mark Crosby of Monash University said, describing household debt as already concerningly high.
And when the RBA does flick the switch on a rate increase, it could trigger a “mortgage arrears time bomb”, CLSA Premium’s Peter Boehm said.
However, others argue the laws penalise good borrowers.
“The regulations are pretty silly now, requiring lenders to turn down plenty of viable lending,” Nicholas Gruen of Lateral Economics said, adding that borrowers inject investment into the economy.
In the bank's statement on Tuesday, RBA Governor Philip Lowe voiced support for the current lending settings.
"Lending rates for most borrowers are at record lows and housing prices across Australia have increased recently," he said.
"Housing credit growth to owner-occupiers has picked up, but investor and business credit growth remain weak. Lending standards remain sound and it is important that they remain so in an environment of rising housing prices and low interest rates."
Beware 'panic buying' property
Regardless, borrowers need to keep a cool head when it comes to picking up a property these days, RateCity.com.au research director Sally Tindall said.
The comparison platform’s analysis found the average borrower can now take out a significantly bigger loan without facing higher mortgage repayments, and in fact save $140 on monthly repayments.
But just because borrowers can, doesn’t mean they should.
“Ultra-low interest rates have put a rocket under the property market and it’s showing no signs of slowing down,” Tindall said.
“While low rates are driving current prices north, predictions of up to 20 per cent property price rises over the next couple of years are pushing people to panic buy.”
She said that while borrowers are “rattled” at the risk of being priced out, they need to exercise caution.
“If you are looking to buy a home, don’t just work out the monthly mortgage repayments, look at how much debt you’re willing to take on,” she said.
“Interest rates are keeping mortgage repayments manageable now, but home loans are a 30-year commitment. The last thing you want is to be saddled with debt you can’t afford to repay in five- or ten-years’ time.
“In this unpredictable life, jobs can be lost, or incomes slashed without warning. When it comes to a home loan, don’t bite off more than you can chew.”
The battle to get unemployment down, wages up
While the property market continues to strengthen, the RBA faces a challenge in reducing unemployment.
"Wage and price pressures are subdued and are expected to remain so for some years. The economy is still operating with considerable spare capacity and the unemployment rate remains higher than it has been for some years," Lowe said.
"Further progress in reducing spare capacity is expected, but it will be some time before the labour market is tight enough to generate wage increases that are consistent with achieving the inflation target."
Under the bank's main scenario, the unemployment rate will stick to 6 per cent at the end of 2021, falling to 5.5 per cent in 2022.
And inflation is expected to hit 1.25 per cent over this year and 1.5 over 2022 in underlying terms.
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