Monetary Policy Remains Conducive

Monetary policy remains conducive to house price growth, but headwinds could be on the horizon

Commentary by Eliza Owen, Head of Research, CoreLogic Australia

Today the RBA maintained its current monetary policy settings, with the cash rate target remaining at 0.1%, and the interest rate on exchange settlement balances at 0.0%. Likewise, there was no change to the rate of government securities purchases with purchases expected to continue at $4 billion per week until at least mid-February of next year.

The low cash rate target has induced a continued decline in typical mortgage rates, supporting an increase in residential real estate values of 20.3% in the 12 months to September.

Economic conditions are not currently conducive to an increase in the cash rate, and the RBA maintains the view that, under a central scenario, the conditions required for an increase to the cash rate target would not be met until 2024. Australia’s wage price index increased 1.7% over the year to June, and core inflation remained below the 2-3% target band at around 1.75%. The recent lockdowns associated with the delta variant of COVID-19 may also have pushed out expected timings for further tightening in the labour market, higher wages growth, and a sustained period of high core inflation.

While monetary policy could continue to support increases in housing values, there are headwinds to future housing market growth.

One of these headwinds is tighter credit conditions. In recent months, the RBA has reiterated that house prices are not an area of direct responsibility for the RBA. In fact, the rising wealth effects and transaction activity associated with high housing demand have likely supported economic conditions throughout COVID-19.  However, there is a mounting expectation that the housing lending space could see some macro-prudential intervention. In its statement today, the RBA made direct reference to the importance of appropriate loan serviceability buffers in the current environment.

This follows the RBA’s release of housing debt ratios, which reveals housing debt to income ratios are at a record high for owner-occupiers at 102%. RBA data also revealed that housing credit has grown 5.6% in the year to June 2021, while national accounts data showed growth in incomes of only 1.6% over the same period. APRA data on quarterly property exposures for ADIs suggests that around 22% of new mortgage lending has a debt-to-income ratio of six or more. This may also become a focus for more prudent lending conditions.

It is also worth noting that while monthly housing market appreciation has been strong at 1.5% in the month to September, this is actually the slowest monthly rate of increase since January this year. Affordability constraints already appear to be easing momentum in the market, with monthly growth rates of property values likely peaking in March 2021.

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