Rising house prices & high household debt spark concern on RBA cash rate day

The resurgence of Sydney and Melbourne house prices was likely a key topic of conversation at the Reserve Bank Board’s meeting today, according to one property expert. But could the price rise spark concerns about how Aussie households will manage at a time of record-high household debt?

The Reserve Bank left the official cash rate on hold today at the historic low of 1%, as was widely anticipated by financial markets and economists.

CoreLogic Research Director Tim Lawless said the recent rebound in property values in Sydney and Melbourne – off the back of historically low mortgage rates – would have been a key talking point amongst RBA Board members today due to the strain it could have on some Australians.

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Sydney suburbs. Source: Taras Vyshnya (Shutterstock)

Many lenders have reduced their variable home loan interest rates since the RBA first cut the cash rate in June and again in July this year, while a number of fixed rate loan customers have benefited from reductions, due to the lower prices banks are paying for long-term wholesale funding.

In the past month alone, there were 111 variable rate cuts at an average of 0.45 percentage points and 575 fixed rate cuts at an average of 0.38 percentage points, according to Canstar’s home loan database.

Mr Lawless said the property market lift in Australia’s two biggest markets, coming at a time when household debt was already at record-high levels, could be a cause for concern and would likely lead the RBA to closely watch housing conditions.

“High levels of household debt are manageable while interest rates are very low, however if debt levels remain elevated when interest rates eventually rise, the risk is that households will need to dedicate more of their income towards servicing their debt and less towards spending,” Mr Lawless said.

According to the most recent analysis of household income and wealth from the Australian Bureau of Statistics, close to three in four households (73%) were in debt in 2017-18, and 28% of those households had debt that was three or more times their annual disposable income.

The ABS said high levels of debt indicate a household could be vulnerable in the event of an economic shock such as an interest rate increase, the loss of a job, a significant illness or injury, a change in family circumstances or a drop in asset prices.

Mr Lawless said if the recent home value growth continues over coming months, we could see some credit policy changes from banking regulator APRA in an attempt to keep a lid on household debt.

“Limiting lending to borrowers on high debt-to-income ratios could be one option, or introducing hard limits on high-LVR lending could be another mechanism that would reduce the risk of a further build up in household debt whilst at the same time allow borrowers to access housing credit and take advantage of such low interest rates,” he said.

AMP Capital Chief Economist Shane Oliver agreed, saying if growth in property market prices continue to gather pace, a “tightening of the screws” from APRA could be expected.

He said the rebound in the Sydney and Melbourne property markets could be an issue for the RBA if it was considering cutting the cash rate further, and it would no doubt cause some concern at the central bank.

“But as we saw over the 2011-17 period, the RBA will do what it believes is right for the ‘average’ of Australia as opposed to one sector or a couple of cities,” Dr Oliver said.

He anticipated the RBA would ultimately trim the cash rate to 0.5% with a further two reductions, predicting that the first of these would “likely” take place as early as next month.

Chief economists from Westpac and ANZ have also forecast the central bank could cut the cash rate in October.

RBA Governor Philip Lowe said in his statement accompanying today’s monetary policy decision that it was reasonable to expect there would be an extended period of low interest rates to assist in reducing unemployment and getting closer to the bank’s target for inflation to be between 2%-3%.

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