Household debt remains RBA’s main concern

Peter Trute and Drew Cratchley
(Australian Associated Press)


Worries about the state of Australia’s housing market, persistent high levels of debt and the high Aussie dollar convinced the Reserve Bank to keep its official interest rate on hold in September, despite improvements in the jobs market.

Continuing price rises in Melbourne’s established housing market – versus easing in Sydney – and further overall growth in mortgage borrowing above household income levels were among the factors that convinced the central bank to hold the cash rate at 1.5 per cent, minutes of the September meeting show.

The widely varied experiences of home owners and aspiring buyers around the nation’s capital cities has presented the RBA with a complicated situation.

The bank board noted “clearer signs of an easing in conditions in the Sydney market” but said prices had continued to grow strongly in Melbourne.

“Borrowing for housing had continued to outpace growth in incomes, although the composition had shifted towards owner-occupiers, with higher interest rates for investors in housing reflecting the ongoing effects of APRA’s recent measures to strengthen lending standards in this area,” the board concluded.

The solid growth seen in employment is expected to continue and gave the RBA hope that ongoing improvement will translate to higher household incomes and consumer spending.

However the RBA board acknowledged “risks to this scenario from growth in housing debt having outpaced the slow growth in household incomes over the preceding few years”.

The minutes, released on Tuesday, also indicate the bank remained concerned about the impact any rate hike might have on the Aussie dollar, which has risen strongly against the US greenback in recent months and slowed economic growth and inflation.

“A further appreciation of the Australian dollar would be expected to result in a slower pick-up in growth and inflation,” the minutes said.

The Australian dollar fell following the release of the RBA minutes at 1130 AEST, which also coincided with the release of Australian Bureau of Statistics data showing capital city home prices rose 1.9 per cent in the June quarter – less than the 2.2 per cent rise in the March quarter.

The RBA’s repeated mention of the risks associated with high household debt and low inflation indicated interest rates will likely remain on hold well into 2018, RBC Capital Markets economist Su-Lin Ong said.

“It hints at a central bank that is likely to sit on its hands until it sees much stronger signs of higher wages and inflation while monitoring broad house price developments,” she said.


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