Financial stability risks, particularly in the housing sector, have taken on increased importance in RBA Governor Philip Lowe’s monetary policy deliberations. The importance of managing such risks was reiterated in the central bank’s November monetary policy statement.
“Household incomes are growing slowly and debt levels are high,” Lowe said, highlighting the uncertain outlook for household consumption given the recent weakness in retail sales.
Referring specifically to household debt, Lowe said that “growth in housing debt has been outpacing the slow growth in household income for some time,” repeating similar warnings issued in October.
Despite persistently low inflationary pressures, anaemic economic growth, reduced household spending, and the weakening Australian dollar, Lowe has left interest rates unchanged since he became governor in September 2016, a distinct shift in mindset compared to recent years.
Rates no longer move like clockwork in the month following a quarterly consumer price inflation (CPI) report. This has been replaced by a broader focus that places less emphasis on inflationary outlook and more on what could happen to other parts of the economy should rates be lowered again, particularly in the volatile east coast property markets.
The era of continually lowering interest rates to bring inflation back to the Reserve Bank’s 2-3% target more quickly now appears to be over.
Lowe knows all too well what happened last year, when the Reserve Bank slashed rates twice in an attempt to boost inflationary pressures. Property prices in Sydney and Melbourne surged, thanks largely to renewed investor activity. Household debt levels, as a consequence, rose from already elevated levels, far outpacing the slower growth in household incomes.
Household leverage has continued to increase, which helps explain why Lowe has been reluctant to slash rates again and propel price growth even further in Sydney and Melbourne. He also told MPs earlier this year that more rate cuts “would probably push up house prices a bit more, because most of the borrowing would be borrowing for housing.”
Instead of hiking interest rates to mitigate the country’s financial stability risks, the Reserve Bank, together with the other members of the Council of Financial Regulators (CFR) – the Australian Prudential Regulation Authority (APRA), the Australian Securities and Investments Commission (ASIC), and the Treasury – decided to try a different strategy.
The CFR introduced tougher macro-prudential restrictions on interest-only home lending in March, building upon the 10% annual cap on investor housing credit growth introduced by APRA in late 2014.
Numerous sources, including CoreLogic, show that these regulatory restrictions are helping to cool Sydney and Melbourne’s property markets.