RBA keeps rates on hold but lending ‘speed limits’ may come into play

The Reserve Bank of Australia still plans to keep official interest rates at record lows over the next few years but economists expect regulators will step in to cool the red-hot property market later this year or next.

The RBA board kept the cash rate and other key policy rates at 0.1% after its monthly meeting on Tuesday.

RBA governor Philip Lowe said lending rates for most borrowers are at record lows.

“Housing markets have strengthened further, with prices rising in most markets,” Mr Lowe said in a statement after Tuesday’s meeting.

“Housing credit growth to owner-occupiers has picked up, with strong demand from first-home buyers. In contrast, investor credit growth remains subdued.

“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.”

Mr Lowe has ruled out an early rate rise. On Tuesday, he again said the board will not increase the cash rate until actual inflation is sustainably within its 2-3% target range and it did not expect the required economic conditions to be met until 2024 at the earliest.

While the RBA and the Australian Prudential Regulation Authority do not target housing prices, regulators are closely watching lending standards as property prices surge on the back of ultra-low rates, unprecedented buyer demand and a low supply of stock.

Macroprudential ‘speed limits’ likely but the question is when

With property prices tipped to rise by as much as 20% or more over 2021 and 2022, economists believe it is increasingly likely APRA will introduce macroprudential ‘speed limits’ later this year or next year to cool an overheating market, if lending standards deteriorate.

Realestate.com.au director of economic research Cameron Kusher said without intervention in the form of macroprudential policies, record low borrowing costs and certainty that they will remain that way for some time are likely to propel property prices higher.

Mr Kusher said while macroprudential policies had been used in the past to address a relaxation in lending standards, given the heat in the property market the tools were increasingly used to cool the market and slow the march in household debt levels.

“This isn’t really about lending policies but more concerns about overheating,” he said.

“We’ve seen in the past that macroprudential policies lead to a rationing of credit, which leads to a slowdown in price growth and, depending on how severe the measures are, it can lead to price falls,” Mr Kusher added.

APRA chair Wayne Byres said the regulator had a range of tools it could use should risks materialise in the market, but noted lending statistics at an aggregate level do not show major signs of a return to higher risk lending.

“There does not seem cause for immediate alarm. Nor, though, for complacency,” Mr Byres said in a speech last week.

APRA set temporary limits on investor loans in 2015 and interest-only loans in 2017 to reduce higher-risk lending, before removing the benchmarks in 2018.

AMP Capital chief economist Shane Oliver said the booming property market indicated macroprudential tightening was likely getting closer.

“The first thing to do would be to increase interest rate buffers used by banks to assess how much people can borrow, but limits on high loan-to-valuation ratio lending and high debt-to-income ratio lending may make sense too,” Dr Oliver said.

ANZ senior economist Felicity Emmett and economist Adelaide Timbrell said they expect strongly rising house prices – forecasting price gains of 17% across the capital cities in 2021 – and a likely easing in lending standards will see APRA step in with macroprudential controls later this year, which would slow growth to 6% in 2022.

“Signs of easing lending standards will be the trigger for the regulator rather than the extent of house price gains,” they said in ANZ’s latest housing market update.

“A soft touch approach from the regulator is likely in the first instance, followed by harder limits, most likely targeted at high debt-to-income loans.”

Commonwealth Bank of Australia economists, however, do not expect APRA will step in to cool the market this year.

“The housing market is red hot, but growth in the stock of housing debt is modest and we do not expect macroprudential policies to be implemented in 2021,” CBA head of Australian economics Gareth Aird said.

Cash rate on hold but fixed rates likely to rise

Mr Kusher said the RBA board was clear they want inflation back within target and full employment before lifting the cash rate.

“In saying that, a lot of people are locking in mortgage rates now and there is no certainty that banks won’t have changed rates independently of the RBA upon expiry of the fixed-rate period.”

Ms Emmett and Ms Timbrell said fixed mortgage rates are likely to rise in the second half of 2021, given the term funding facility – through which the RBA provides low-cost funding to the banks – ends in June and the likelihood the RBA chooses not to change its yield curve control target.

They also noted that a large proportion of the new fixed-rate loans taken out over the past six months will begin rolling off from May 2023.

“By then, fixed rates are likely to be significantly higher and variable rates will also likely be higher given higher funding costs for the banks,” they said.

“So, even without a lift in the cash rate, the housing market will face higher rates as early as the second half of 2021, with a more significant tightening in 2023.”

RateCity.com.au research director Sally Tindall said over the past month, most of the changes in one, two and three-year fixed rates have been cuts.

“However, in the last month the majority of four-year fixed rate changes were in the opposite direction as some banks start to factor in a likely rise to the cash rate in 2024 and the end of the RBA’s term funding facility on 30 June this year,” she said.

Originally published as: RBA keeps rates on hold but lending ‘speed limits’ may come into play