Warning on booming house prices
The Reserve Bank of Australia has sounded a warning on booming house prices, signalling it will clamp down on risky lending if the market overheats.
After keeping interest rates at the historically low level on 0.1 per cent on Tuesday, RBA governor Philip Lowe noted the housing market had strengthened.
Housing credit growth to owner-occupiers had also picked up, with strong demand from first-home buyers, but investor credit growth remained 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 said.
RateCity.com.au research director Sally Tindall warned a rate hike was on the horizon in 2024 when many homeowners would come off a three-year fixed rate.
"It's incredible to think there are over one million homeowners who have never experienced a cash rate hike," she said.
"The concern is, some people fighting tooth and nail to get into the property market today haven't thought about whether they can meet the repayments in three or four years' time.
"When applying for a mortgage, banks factor in a 2.5 per cent buffer on the ongoing rate. However, people should stress-test the loan for themselves."
The RBA indicated last month the national cash rate would remain at 0.1 per cent until inflation reached the target level of between 2 and 3 per cent.
Mr Lowe said at the time it meant wages growth would have to be "materially higher", which was not expected until at least 2024.
On Tuesday, Mr Lowe said while there were still "considerable uncertainties" for the global outlook, there had been improvements.
"The rollout of vaccines is supporting the recovery of the global economy, although the recovery is uneven," he said.
"Global trade has picked up and commodity prices are mostly higher than at the start of the year. Inflation remains low and below central bank targets."
Mr Lowe noted sovereign bond yields had increased in recent months due to good news about vaccines and extra fiscal stimulus in the United States.
"Inflation expectations have also lifted from near record lows to be now closer to central banks' targets," he said.
"The three-year government bond yield in Australia is at the board's target of 10 basis points and lending rates for most borrowers are at record lows."
The Australian dollar also remains in the upper end.
Unemployment fell to 5.8 per cent in February, but Mr Lowe said it was still too high.
Gross domestic product increased by 3.1 per cent in the December quarter, helped by a lift in household consumption, and above-trend growth was also expected this year and next.
"Household and business balance sheets are in good shape and should continue to support spending," Mr Lowe said.
"Nevertheless, wage and price pressures are subdued and are expected to remain so for some years.
"In the short term, (Consumer Prince Index) inflation is expected to rise temporarily because of the reversal of some COVID-19-related price reductions."
Since the COVID-19 pandemic hit, the RBA has cut the cash rate three times in a bid to support the economy.
It has also introduced support measures, including a term funding facility, which is providing banks with cheaper debt funding that can be passed onto households and businesses.
The RBA will release its twice-yearly financial stability review later this week.
Originally published as Warning on booming house prices