RBA holds interest rate at 1.5%

Reserve Bank of Australia governor Philip Lowe has raised concerns about a possible housing crisis as household incomes fail to keep pace with mortgage costs.

If the recent run of soft data continues and macroprudential measures work to restrain home prices, the RBA might see room to lower rates again.

"The idea that you should be focusing exclusively on these broad tax policies that have impacted every market and will impact it differently, you've got to be very careful about this".

Not surprisingly, the rising prices have encouraged people to buy residential property as an investment in the hope of ongoing capital gains. "In the big picture, the Australian dollar has gone from pricing in cuts (in interest rates) to things being far more stable". This has reinforced the upward pressure on prices.

Also undermining the Aussie was the RBA's considerable caution on the housing market as prices continue to rise. This council, which I chair, brings together the heads of the RBA, APRA, ASIC and the Australian Treasury. Our banks are resilient and they are soundly capitalised.

The markets reacted negatively to the RBA statement and to Governor Lowe's comments and sold off the Australian dollar.

Housing affordability has become a hot-button issue with many first-time buyers priced out of the market, especially in Sydney and Melbourne, where 40 percent of the country's 24 million people live. Over the past year the value of housing-related debt outstanding increased by 6½ per cent. Housing-related debt rose at a 6.5 percent annual pace previous year while household incomes increased by 3 percent.

He also sounded the alarm on Australia's crippling level of household debt, saying "the level of household debt in Australia is high and it is rising". Core inflation remains low.

Under the full plan that would take the corporate tax rate to 25 per cent for all businesses, the government has repeatedly spruiked it would deliver a one per cent dividend for economic growth in a decade's time.

"In assessing whether borrowers can meet loan repayments without substantial hardship in the short and longer term, it is important that lenders can collect and rely on information which provides an accurate view of the consumer's financial situation".

In recent weeks the Property Council of Australia, the Australian Institute of Company Directors and the chair of the government's financial system inquiry David Murray have backed a change.

"It would consider further measures if needed", he warned.

"Lowe said that "too many loans are still made where the borrower has the skinniest of income buffers after interest payments", warning that many banks and home lenders are too happy to offer home loans to those who may not be able to truly afford them".

  • Zachary Reyes