Surging house prices have put the RBA on the back foot, preventing another interest rate cut

Jack Derwin
  • As Sydney and Melbourne continue their rapid house price recovery, and with strong growth forecast nationally in 2020, the Reserve Bank of Australia (RBA) is reluctant to cut interest rates again.
  • In the minutes from its February meeting, the RBA expresses concern "a further reduction in interest rates could also encourage additional borrowing at a time when there was already a strong upswing in the housing market amid rising house prices."
  • It could see the RBA stay on hold longer than it would like, although the unemployment level and the coronavirus outbreak could force its hand.
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The Reserve Bank of Australia (RBA) has its hands tied.

While acknowledging the pressures the Australian economy faces on top of the yet unknown impact of the coronavirus outbreak and the Australian bushfires, the RBA board is looking a little gunshy when it comes to cutting rates again.

"Internationally, concerns had been raised about the effect of very low-interest rates on resource allocation in the economy and their effect on the confidence of some people in the community, notably those reliant on savings to finance their consumption," the board revealed in the minutes from its rate decision last meeting, released on Tuesday.

Specifically, the RBA appears concerned that another rate cut would only tip fuel on a housing price recovery already in full swing.

"Prices had increased very strongly in Sydney and Melbourne in recent months. Higher housing prices and the associated increase in housing turnover were expected to support consumption and dwelling investment," it noted.

"[But] a further reduction in interest rates could also encourage additional borrowing at a time when there was already a strong upswing in the housing market."

The property markets are already expected to pick up speed this year, with 10% and 8% rises forecast by Domain in Sydney and Melbourne respectively. If those forecasts were to come to pass, both cities would far surpass previous record highs set in 2017. Perhaps rightfully the RBA does not want to unnecessarily fuel a greater accumulation of household debt, considering lenders are already seeing significant appetite for new lending. The RBA remains concerned that mortgages are the key beneficiary of falling rates, with Australians more inclined to pay down debt rather than spend in – and stimulate – the real economy.

"Members discussed whether this increase reflected a change in behaviour by households and the potential for it to persist. They noted that some households were likely to be repaying their debts faster in response to low growth of their incomes and the earlier fall in housing prices."

However, with the Australian economy facing subdued household spending and missing wage growth at the same time its biggest trading partner China is missing in action, there's certainly an argument to be made that further cuts are required.

With the official cash rate sitting at 0.75%, and with the expectation it'll approach zero as the year wears on, pundits are speculating over what it will take to tip the RBA into action. JP Morgan head of fixed income Bob Michele told the AFR the coronavirus would force its hand.

"You just have to look at the numbers of Chinese tourists and Chinese students that come to Australia – it’s significant – it's in the millions," Michele said on Tuesday.

Which way the wind is blowing will be made clearer when wage and employment data drops later this week. Any big movement up or down for the Australian employment level -- a leading stress test for the RBA -- would all but indicate whether interest rates are going to be cut or held for now.

If unemployment holds at 5.1% however, booming property prices could keep the RBA at bay for now.