Low-interest rates limit price growth, economist says

By Gerv Tacadena

The record-low interest rate makes it impossible for prices to inflate beyond income growth again

As household debt continues to outpace income and the central bank's cash rate remains record-low, is it valid to say that Australia's property super-cycle has already waned?

For a senior economist at the Commonwealth Bank of Australia (CBA), it is. Gareth Aird told Business Insider Australia that the capacity of home prices to grow at a rate beyond income growth is now more limited given the low-interest rate environment.

“As interest rates cannot go much lower, at least not in a material sense, we are unlikely to see the sort of growth in dwelling prices over the next 30 years that we did in the previous 30," he said.

The economist added that the record-low borrowing costs would contribute to the limits of  growth in the near future.

Aird also noted the likelihood of stricter lending standards, making the likelihood of debt-fuelled home price growth, as has happened in the past, unlikely to happen again.

The central bank has left the interest rate on hold at 1.5% for a record 19th consecutive month in May.

In its quarterly monetary policy statement, the Reserve Bank said its rates would have to go up at some point, which would depend on the growth in inflation and wages. The central bank also cautioned that any increase in rates would have to be moderate, given the household debt level.

“The high level of household debt also carries certain risks, including that households’ spending decisions, might become more sensitive to unexpected weakness in income or wealth,” the RBA said.

 

Related stories:
The reason behind central bank's efforts to maintain interest rate
What do consumer prices tell about interest rates in Australia?

 

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