Australia’s official interest rate will remain at 0.10 per cent after the Reserve Bank of Australia (RBA) handed down its official verdict on Tuesday afternoon.
It comes as Australian home values record their fastest monthly growth in 32 years, increasing 2.8 per cent in March and sparking concerns of a bubble.
The median home value is now $624,768, an increase of $15,884 since January.
RBA Governor Philip Lowe said this trend is something the bank will now be monitoring closely.
He noted that as prices rise in most markets, strong first-home buyer demand stands in contrast to subdued investor borrowing.
"Given the environment of rising housing prices and low interest rates, the Bank will be monitoring trends in housing borrowing carefully and it is important that lending standards are maintained," he said.
Borrowers prepare for hikes
While the Bank has said it won’t conceivably increase rates until 2024, Australian borrowers are already eyeing the rocketing property market and preparing for higher mortgage repayments.
Two in five Australians believe home loan rates will increase sometime before the end of next year, according to Canstar research.
Most tip a faster-than-expected economic recovery, property price growth and inflation as the reasons why lenders’ rates will increase.
Some banks are already moving to increase rates, with the Commonwealth Bank, the Bank of Queensland and Bendigo Bank among those already shifting four and five year fixed rates higher.
“The wildcard ... reason people cite for rate increases is property price growth. There could be a game of brinkmanship among the regulators and Government deciding which of them will fix the emerging social problem of runaway house prices,” Canstar’s group executive, financial services, Steve Mickenbecker said.
“To address rising house prices it’s expected this year there will be a combination of macro prudential measures, tax reform and removal of construction and purchase incentives.”
However, he said it’s unlikely the Reserve Bank will increase rates ahead of schedule, and borrowers are better off searching for a better deal on the market.
The challenge ahead
The RBA is looking to achieve an unemployment rate of 4 per cent or less to trigger higher wages and lift inflation to between 2 and 3 per cent.
Currently, unemployment is at 5.8 per cent after a bigger-than-expected fall in February, while inflation is at 0.9 per cent. It’s struggled to bring inflation to its target for around six years.
Reaching a sub-4 per cent unemployment rate would mean returning to employment levels last seen before the Global Financial Crisis.
Lowe said that while the economic recovery has been stronger than expected, wage and price pressures will remain weak for the years to come.
"The economy is operating with considerable spare capacity and unemployment is still too high. It will take some time to reduce this spare capacity and for the labour market to be tight enough to generate wage increases that are consistent with achieving the inflation target," Lowe said.
Most economists agree the RBA will be hard pressed to achieve both of these goals before 2023.
“The RBA is waiting for core inflation to stabilise within its range of 2-3 per cent, which is some time off even under a strong upside growth scenario. The market has run ahead of the RBA and will rerate the timing of the first rate hike after the RBA's next meeting,” QIC chief economist Matthew Peter told the Finder interest rate survey.
“Progress toward a tighter labour market continues to beat expectations, but it will be some time before wage growth increases materially,” added BIS Oxford Economics’ Sean Langcake.