Housing market booming as Reserve Bank keeps interest rates on hold

Australia’s housing boom continues as the Reserve Bank of Australia keeps official interest rates at record lows, although fixed mortgage rates are starting to rise.

The RBA board kept the cash rate and other key policy rates on hold at 0.1% after its monthly meeting on Tuesday.

RBA governor Philip Lowe noted lending rates for most borrowers are at record lows.

The Board decided to maintain the current policy settings – https://t.co/lPJo961Lfw

— RBA (@RBAInfo) June 1, 2021

“Housing markets have strengthened further, with prices rising in all major markets,” Mr Lowe said in a statement after Tuesday’s meeting.

“Housing credit growth has picked up, with strong demand from owner-occupiers, especially first-home buyers. There has also been increased borrowing by investors.

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

While Australia’s economic recovery during the coronavirus pandemic has been stronger than expected, the RBA board still did not expect to lift the cash rate before 2024.

Mr Lowe said the board will not increase the cash rate until actual inflation is sustainably within its 2-3% target range.

“For this to occur, the labour market will need to be tight enough to generate wages growth that is materially higher than it is currently,” he repeated on Tuesday.

“This is unlikely to be until 2024 at the earliest.”

Low rates driving demand as market booms

Record low borrowing costs are likely to be in place for a number of years and are a major factor in the housing boom, realestate.com.au director of economic research Cameron Kusher said.

“It’s a very big factor because people still can’t spend money how they would like to with, for example, international borders shut,” Mr Kusher said.

“The low borrowing costs and the likelihood of those low costs for a number of years means that buyers have some comfort and it has undoubtedly contributed to the strong demand for homes and the subsequent price increases.”

Buyer demand is far outstripping the supply of properties for sale, with property listings still unable to keep up with the homebuying frenzy.

Buyer demand is far outstripping the supply of properties for sale. Picture: realestate.com.au/buy

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Mr Kusher said the level of demand and the volume of sales in the market remained high, although both had eased a little after Easter.

“I expect prices to continue to rise over winter, however, with reduced demand, some stimulus removed and rises in longer-term fixed mortgage rates, prices are likely to rise at a slower pace.”

Property prices are tipped to surge by 20% over 2021 and 2022, with economists at the big four banks forecasting gains of at least 10% and as much as 17% this year. The pace of growth of early 2021 is expected to slow down, particularly next year.

AMP Capital chief economist Shane Oliver said Australia’s housing boom was continuing.

“The fundamentals of still ultra-low mortgage rates, ongoing government incentives with HomeBuilder ended but first home loan deposit schemes expanded, economic recovery, the strong jobs market and FOMO (buying now for fear of missing out) point to further home price increases ahead,” he said on Tuesday.

Dr Oliver said there would be a gradual slowing in the pace of price gains going forward, due to factors including poor affordability and a bottoming in fixed mortgage rates, which now account for about 40% of new housing finance.

“Longer term the RBA is more determined than ever to see inflation sustained in its target range, which will ultimately put an end to the long-term downtrend in interest rates and mean higher variable rates,” he said, adding that variable rate hikes were probably two years away at least.

“So it’s likely that the 30-year tailwind for the property market of falling interest rates has now run its course.”

Australian Bureau of Statistics data released on Tuesday showed the number of dwelling approvals fell 8.6% in April, although the ABS noted the end of the HomeBuilder grant on 14 April did not have a material impact as the building approval process typically occurred after the submission of a HomeBuilder application.

“While there was a fall in overall approvals, the April result highlights the continued strong demand for detached housing, with private sector house approvals reaching a new record high in April, up 4.6%,” ABS director of construction statistics Daniel Rossi said.

Fixed mortgage rates starting to rise

While the official cash rate will remain on hold, longer-term fixed mortgage rates – those over four and five years, as well as now three-year rates – are starting to rise from record lows below 2%.

“Over recent weeks we have seen rates on longer-term fixed rate mortgages start to rise and that may give borrowers pause for thought about the prospect of higher rates in the future,” Mr Kusher said.

Banks are starting to factor in the likely increase in the cash rate in 2024, a rise in bond yields and higher funding costs after the RBA’s term funding facility ends on 30 June.

“I expect we will see fixed rate mortgages continue to rise. We know 10-year bond yields have risen and the economic recovery has progressed better than expected,” Mr Kusher said.

While the Reserve Bank will keep the cash rate on hold, fixed mortgage rates are starting to rise. Picture: Getty

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The RBA provided $200 billion in low-cost funding to the banks through the term funding facility, which was announced in March 2020 as part of a monetary policy package to support the economy through the COVID-19 pandemic.

“I suspect once banks lose access to this very low funding mechanism we will see some repricing of mortgage rates, particularly fixed mortgage rates, which have seen larger declines than variable rates,” Mr Kusher said.

Mr Lowe said the facility was providing low-cost fixed-rate funding for three years and so would continue to support low borrowing costs until mid-2024.