RBA to stay on hold, while mortgage rates rise – HSBC

Paul Bloxham, Chief Economist at HSBC, explains that Australian effective mortgage rates have edged higher, which should help to cool the housing market and with wages growth and inflation still sluggish, we see the RBA on hold through 2017, despite concerns about housing prices.

Key Quotes

“Exuberance in the Sydney and Melbourne housing markets has become an increasing concern for the central bank and the prudential regulator. Of particular concern has been the re-invigoration of investor interest in these markets, with new investor loan approvals rising strongly in recent months. Rising housing prices and debt have motivated RBA Governor, Phil Lowe, to repeatedly state that it would not be in the ‘public interest’ to cut the cash rate, even if it got inflation back on target sooner, if it also drove a further rise in house prices and debt.”

“But what about a rate rise? Could the RBA consider lifting the cash rate to cool the housing market? This is unlikely. Indeed, if the central bank were to lift the cash rate just to deal with the housing market, without being completely confident that wages growth would pick up and that underlying inflation would return to target, it could do more damage than good. A further decline in wages growth could weigh on household incomes and make servicing the now higher household debt levels more difficult.”

“Although the RBA has become increasingly concerned about, and has bolstered its mandate to focus on, financial stability, the cash rate is still first and foremost set with the inflation target in mind. The RBA targets inflation, not housing prices or debt.”

“Instead, the RBA, through the Council of Financial Regulators, has sought help from the prudential authority, which has been further tightening its settings on lending standards. As a result, the banks have been lifting their mortgage rates. On our estimates, the effective mortgage rate for investors has risen by around 25bp over the past month. Maximum loan-to-valuation ratios on certain types of loans have also been lowered to crimp housing credit supply.”

“We expect the authorities to continue to maintain tight prudential settings. The RBA is unlikely to lift its cash rate until it is convinced that wages growth is picking up. At this stage, the signs are that wages growth may be stabilising, but there is little to suggest a pick-up. We expect wages growth to pick up later this year and the RBA to remain on hold through 2017, before lifting its cash rate in 2018.”