RBA eyes property market as home lending soars

The Reserve Bank has kicked off 2021 with a bang, saying it’s unlikely to lift record low interest rates until ‘at least 2024’ and updating growth and employment forecasts.

RBA Governor Philip Lowe addressing the National Press Club in February

During a jam-packed week of appearances, RBA Governor Philip Lowe said record levels of stimulus provided by state and federal governments and the banks have played a key role in limiting the economic downturn, but warned risks remain.

“The first is how households respond over coming months to the tapering of the fiscal and other support measures,” he said during an address at the National Press Club this month.

The unwinding of JobKeeper and the JobSeeker supplement at the end of March are expected to mark a short-term blip in the economic recovery. He says other variables will have a much larger impact.

So, what will be RBA be watching in 2021?

Vaccine rollout

The COVID-19 vaccine rollout will undoubtably be the key factor in the road to recovery moving forward. Dr Lowe says while it has reduced one of the big uncertainties, the outcome is not guaranteed.

“The global rollout of the vaccines faces challenges and there are a range of other uncertainties about the global economy, including trade tensions,” he said.

“We hope for the best here, but we also need to be prepared for further setbacks in what remains a highly uncertain world.”

Housing Market

Record low interest rates, government grants and soaring consumer confidence is setting the scene for a real estate rally in the year ahead.

But that won’t be the focus of the RBA.

“The RBA does not – and should not – target housing prices,” Dr Lowe told a parliamentary economics committee hearing in early-February.

“Instead our focus is on the lending that is used to purchase housing. We want to see lending standards remain strong.”

What if lending standards deteriorate?

Government incentives and low borrowing costs have caused a surge in lending for new house purchases, with loans issued to first home buyers hitting a decade high in December.¹

With property prices forecast to rise this year, REA Insights Economic Analyst, Paul Ryan says that could become a concern if buyers begin taking on too much debt to purchase a property.

“If the RBA and the Council of Financial Regulators see a deterioration in these standards, such as high levels of high loan-to-value borrowing, they may consider some limits to these types of lending or other limitations,” he said.

As the Chair of the Council of Financial Regulators, the RBA regularly meets with other members to monitor trends in home lending, and if necessary, to consider intervention.

In 2014, financial regulators were forced to step in and impose tougher lending restrictions on the banks, after surging property prices led to a deterioration in lending standards.

“If we saw anything like the same developments occur again we would do the same,” said Dr Lowe.

For now – he says there are few signs of this occurring.

SOURCES: ¹https://www.abs.gov.au/media-centre/media-releases/record-housing-loan-commitments-continue-december