Australias central bank boss says his biggest worry about booming house prices is whether Aussies are continuing to borrow responsibly, but hosed down speculation interest rates could rise sooner rather than later.Real estate experts were surprised by the resilience of the residential property market last year and that strength has continued into 2021, with CoreLogic data released on Monday showing home values rose by 2.1 per cent last month — the biggest month-on-month leap in more than 17 years.
The data came after ANZ chief executive Shayne Elliott recently said the supply and demand shortage that had driven house prices through the roof was unlikely to end any time soon, and could easily spark an interest rate hike.
Canstar group executive of financial services Steve Mickenbecker agreed, saying the Reserve Bank of Australia could find itself under pressure to move a lot sooner than it had expected.
But at a business forum on Wednesday, RBA governor Philip Lowe addressed expectations of possible increases in the cash rate as early as late next year and then again in 2023.
“This is not an expectation that we share,” he said.
Mr Lowe said he would be worried if Australians started “borrowing ridiculous amounts of money” in a speculative way.
“The issue is, prices are rising. Are people borrowing responsibly and carefully?”
He said looser lending standards would create financial risks and add to the upward pressure on prices.
“We are not at this point, but we are watching carefully,” Mr Lowe said.
He said the cash rate would remain steady at a record low of 0.1 per cent until inflation was “sustainably” within the 2 to 3 per cent range.
“It is not enough for inflation to be forecast to be in this range,” Mr Lowe said.
“Before we adjust the cash rate, we want to see actual inflation outcomes in the target range and be confident that they will stay there.
“This is an evolution from the approach earlier in the inflation-targeting regime, in which forecasts of inflation played a more central role in decision-making about interest rates.
“We continue to pay close attention to the forecasts, but we want to see actual inflation outcomes consistent with the target before moving the cash rate.”
Mr Lowe said the board was keeping an eye on the housing market but there were many factors to consider.
“There are many moving parts at present: record low interest rates; a shift in preferences towards houses and away from apartments; strong demand for housing outside our largest cities; large government incentives for first-home buyers and home builders; and the slowest population growth in a century,” he said.
“Time will tell as to how these various factors ultimately balance out, but history suggests that shifts in population growth can have large effects on the housing market.”
For inflation to reach the target band, it was likely wages growth would need to be “sustainably” above 3 per cent but was currently running at just 1.4 per cent, the lowest rate on record, Mr Lowe said.
“Even before the pandemic, wages were increasing at a rate that was not consistent with the inflation target being achieved,” he said.
“We are a long way from a world in which wages growth is running at 3 per cent plus.”
CommSec chief economist Craig James said Mr Lowe was at pains to stress the economic recovery had a long way to go.
“The governor sought to emphasise that he believes that rising bond yields are sending false signals on the inflation risk and the potential for a lift in the cash rate,” Mr James said.
“While ruling out the use of monetary policy to slow housing demand, Governor Lowe indicated that the focus was very much on lending standards.”