Interest rate cuts are fuelling property bubbles in Sydney and Melbourne – prompting warnings about the prospect of mounting household debt.
According to prominent economists, the Reserve Bank of Australia’s long-term commitment to maintaining low interest rates is fuelling property booms in Australia’s two largest cities.
This marked the third consecutive month of price jumps in Australia’s two largest cities, and indicated to some analysts that values were yet again set to race well ahead of wages growth.
RBA governor Philip Lowe himself acknowledged the problem of rising asset prices in a speech last week.
But he has since said the RBA will need to keep interest rates low for “an extended period” to overcome softness in the economy.
Coupled with APRA’s easing of lending and mortgage serviceability requirements, the RBA’s interest rate cuts are paving the road towards another debt-fuelled housing bubble, according to IFM Investors chief economist Alex Joiner.
“The Reserve Bank wants to tread a very, very fine line … because it knows it needs to do more to stimulate the economy, so it’s taking rates down, but equally it knows that could lift asset prices, which in the Australian context is dwelling prices,” Dr Joiner said.
“It’s questionable how much [further cuts to the already-low interest rate] will help the economy, but we do know they will add to household debt. And the RBA has said it doesn’t see that as a particularly welcome development.”
According to a recent RBA report, Australian households at the end of March 2019 held a record-high $1.90 in debt for every $1 of income earned.
RBA researchers found the high level of debt was dragging down consumer spending, with a 10 per cent increase in debt linked to a 0.3 per cent decline in household spending.
Crucially, they also found this relationship held true when the value of a household’s assets had increased over time – a finding which researchers said helped explain the “puzzle of unusually weak household spending in Australia”.
“It’s a difficult one for the Reserve Bank,” Dr Joiner said.
“I would expect macro-prudential measures (lending restrictions such as caps on investor lending) to be on the table at some point. And the reason I say that is the Reserve Bank has only got one tool [interest rate cuts] and so will need some help in managing the economy.”
Dr Joiner said a new round of lending restrictions would take some heat out of the housing recovery in Sydney and Melbourne, which would keep a lid on household debt and encourage people to spend.
Former ANZ chief economist Warren Hogan agreed low rates were fuelling price booms in Sydney and Melbourne, with both cities now growing at the equivalent of 10 per cent, on an annual basis.
But he said it was unclear whether regulatory intervention would slow the rapid rate of growth.
“There are a lot of people who say what APRA did three or four years ago with targeting investment was successful and that they could do that again,” Mr Hogan told The New Daily.
“But my read of the data is that what really impacted the provision of credit wasn’t so much the APRA regulation but the royal commission’s [impact on bank lending].”
Rather than increase regulation, Mr Hogan said the RBA should fall in line with global economic trends and broaden its inflation target of 2 – 3 per cent to 1 – 3 per cent.
Mr Hogan said this would eliminate the need for more rate cuts, which in turn would reduce the risk of another property bubble and prevent household debt from growing further still.
“At this stage, it looks like the turnaround is not associated with a huge amount of debt over and above income growth,” Mr Hogan said.
“But if we get into the middle of next year and credit growth is back at 8 per cent and income growth is at 4 per cent, then that’s definitely back into bubble territory.