Property prices tipped to grow further as interest rates remain near zero

Households are taking on bigger mortgages to keep up with property prices, which have surged as buyers compete for a shrinking pool of properties.

At its monthly meeting on Tuesday, the Reserve Bank of Australia board held the official cash rate steady at a record low of 0.1%, where it’s remained since November 2020.

While RBA governor Philip Lowe acknowledged the low interest rate environment was helping to drive property prices higher, he said the central bank remained committed to supporting the economy as extended lockdowns grip New South Wales, Victoria and the ACT.

“Prior to the Delta outbreak the Australian economy had considerable momentum,” Mr Lowe said in a statement.

“The recovery in the Australian economy has, however, been interrupted by the Delta outbreak and the associated restrictions on activity,” he said.

But Mr Lowe said the setback would only be temporary, confirming the the RBA will push ahead with plans to unwind other key policy measures which have helped to keep borrowing costs low and support the economy.

“The Delta outbreak is expected to delay, but not derail, the recovery,” he said.

In July, the central bank announced plans to scale back the next stage of its bond buying program from $5 billion per week to $4 billion a week in early September, until at least mid November. It’s now pushed that timeline out until February at the earliest.

“The board’s decision to extend the bond purchases at $4 billion a week until at least February 2022 reflects the delay in the economic recovery and the increased uncertainty associated with the Delta outbreak,” Mr Lowe said.

“These bond purchases, together with the low level of the cash rate, the yield target and the funding that has been provided under the term funding facility, are providing substantial and ongoing support to the Australian economy,” he said.

Mr Lowe said the RBA will continue to review the bond purchase program, and remained committed to keeping interest rates low for as long as needed to support the economic recovery.

REA Group economist Paul Ryan said the extended lockdowns in several states have diminished any chance the RBA may raise interest rates earlier than 2024.

“It’s certainly put to bed some expectations that there may be cash rate rises earlier than the 2024 that the RBA expected,” Mr Ryan said.

He said there was a possibility the timeline could instead be blown out if households are hesitant to get out and spend once the economy reopens.

“That means that there’s this downside risk to that big snapback that we saw in 2020 and if that occurs, then that could push out expectations for cash rate increase further than the previous expectation of about 2024, but it’s all very uncertain at this stage,” Mr Ryan said.

Property prices tipped to rise further

The prospect of record low interest rates for years to come, combined with increased household savings and fewer property listings, has driven lending and refinancing activity to record highs in recent months.

The latest lending data from the Australian Bureau of Statistics showed a record $17.2 billion worth of mortgages were refinanced during July, 60% higher than a year earlier.

New loans also hovered near record levels, with $32.1 billion worth of new loans issued during the month.

Mr Ryan said households are having to take on larger loans to keep up with property price increases, as the ABS data showed the average mortgage size nationally hit an all-time high of $593,600 in July.

“We’d expect loan sizes to increase with both property prices and lower interest rates and that’s not necessarily a sign of people taking on more risk,” Mr Ryan said.

While the RBA does not target house prices, Mr Lowe said it would continue to monitor for any signs of deteriorating lending standards.

“Housing credit growth has picked up due to stronger demand for credit by both owner occupiers and investors,” Mr Lowe said.

“Given the environment of rising housing prices and low interest rates, the bank is monitoring trends in housing borrowing carefully and it is important that lending standards are maintained.”

Economists at Australia’s largest lender, CBA, said the elevated levels of lending suggest property prices will continue to rise in the months ahead.

“Lending is a good leading indicator of dwelling prices about six months ahead,” CBA economist Belinda Allen said.

“Recent trends in lending suggest dwelling prices will continue to rise this year, although we are expecting the monthly gains to slow,” she said.

Data from shows property prices rose 19.7% nationally over the year to July 2021.

No regulatory intervention expected this year

While affordability constraints are squeezing first-home buyers out, investors have continued to return to the market.

According to the ABS, investor lending has recorded an unbroken period of growth since October 2020 and has almost doubled in value compared to a year ago. In contrast, lending to owner-occupier first‑home buyers fell 6.8% in July after a 7.8% fall in June.

CBA said financial regulators would be monitoring this trend closely.

“Lending to owner occupiers, excluding first-home buyers, rose by 2.4% and lending to investors was up by 1.8%. The latter is now at its highest value since the all‑time high in April 2015,” CBA economist Kristina Clifton said.

“Regulators will no doubt continue to watch these figures very closely as well as the metrics around these loans.”

But Mr Ryan said regulators aren’t likely to impose lending restrictions in the current economic climate.

“Investors are coming back into the market again from a very low base, so, at the margin that signifies a bit more speculative activity in the market,” he said.

“But I don’t think we’re close to that tipping point yet and I don’t think regulators will act while the economy is quite weak, so that would say that they’re going to keep watching the market until early next year, at least, and then we’ll see where lending data is at and how fast prices are growing still.

“Not that there would be action, but that’s when there might be the start of consideration depending on what conditions look like then,” he said.

With fewer properties being listed for sale during lockdowns, Mr Ryan said demand for new loans would likely ease in the coming months anyway.

“There’s a lot of people on that are in the serious stages of buying and that hasn’t really abated in these lockdowns, but what we have seen is seller activity has diminished,” Mr Ryan said.

“Fewer houses turning over mechanically means that there’s less credit growth,” he said.

“Once restrictions ease and sellers can confidently list, we expect activity to rebound towards the end of 2021 with momentum continuing in 2022,” he said.