The head of the Reserve Bank of Australia has predicted the surge in property prices will come to an end, but does not expect the latest wave of COVID lockdowns will push the economy into another recession.
RBA governor Philip Lowe has made it clear the central bank’s board still plans to keep the cash rate on hold until 2024, while acknowledging record-low interest rates are pushing up housing prices.
Mr Lowe on Friday predicted the price boom still had a bit further to go.
“While I hesitate to provide forecasts for the housing market, I think it’s quite likely we’ll see further increases in the next little while,” he told a federal parliamentary committee hearing.
“It’s a global story. It’s not just in Brisbane or Sydney or Melbourne where prices are rising, it’s almost in every city around the world, and it’s largely because interest rates are low and they’re likely to stay low.”
Mr Lowe said low interest rates continue to push prices up, but noted there were now factors at play that could start working in the other direction.
“We’re building a lot of dwellings and the population is not growing as quickly, and every day the prices go up it’s harder for people to afford.
“Ultimately there’s some point at which these things will start equilibrating and the big price rises come to an end, but I’m afraid I can’t forecast when that actually happens.”
The RBA board kept the cash rate on hold at a record low 0.1% after its monthly meeting on Tuesday.
Mr Lowe on Friday repeated the RBA board will not increase the cash rate until inflation is sustainably within its 2-3% target range and it does not expect that condition to be met before 2024.
“It will not be enough for inflation to just sneak across the 2% line for a quarter or two,” he said.
“We want to see inflation well within the target band and be confident that it will stay there.”
Greater Sydney’s extended lockdown has made the RBA’s position on rate changes even clearer, according to realestate.com.au economist Paul Ryan.
Mr Ryan did not expect an early rate move before 2024, even before the latest lockdowns.
“It was very unlikely before, and now I would say it’s definitely not going to happen,” Mr Ryan said.
“There’s the capacity for these lockdowns to have pushed out interest rate rises even more than expected.”
COVID lockdowns ‘unlikely’ to cause recession
Mr Lowe said Australia’s stronger-than-expected economic recovery has been interrupted by outbreaks of the highly infectious Delta strain of the coronavirus, especially in NSW.
Greater Sydney’s long lockdown, Victoria and south-east Queensland’s current snap lockdowns and the earlier short shutdowns in Victoria and South Australia are expected to send the economy backwards in the September quarter.
But Mr Lowe believed another double-dip recession – defined as two consecutive quarters of negative gross domestic product – was unlikely, after Australia experienced its first recession in 29 years in the first half of 2020.
“I think it’s quite unlikely that we’ll have two quarters of negative GDP,” he said.
Mr Lowe predicted GDP will decline by at least 1% in the September quarter, with a bigger fall possible depending on whether there are further lockdowns, and how long the existing ones last.
“But by the end of the year, many of us will be vaccinated, one hopes the restrictions are being eased from late in this quarter and then into next quarter, and as the restrictions are eased the economy should start its recovery.
“We can’t rule out two quarters of negative GDP if the health situation deteriorates but I think it’s quite unlikely at this stage.”
Mr Lowe said significant parts of the Australian economy remain on the positive trajectory that was in place before the recent outbreaks, which was quite different to the situation in the first half of 2020 when the whole of Australia was in lockdown.
“It is important not to lose sight of the fact that not all of Australia is affected,” Mr Lowe said.
He said the experience in Australia, and elsewhere, is that once restrictions are lifted, spending recovers strongly and the economy bounces back quickly.
“While the exact timing of the bounce-back is difficult to predict, it is likely to start well before the end of the year,” he said.
“The vaccination program is ramping up and governments are providing significant targeted income support to help businesses and households get through this difficult period.
“This means that there is a pathway out of the current difficulties this year.”
Housing market strong but regulators not concerned
The RBA’s latest Statement on Monetary Policy released on Friday noted housing prices have been rising in all major markets, after declining during the initial COVID outbreak last year.
“Strong price growth continued through July, including in Sydney, such that national housing prices were around 15% higher than the start of the year,” the RBA said.
The RBA also noted growth in housing credit has picked up and demand for finance from investors has also increased recently, on top of the strong demand from first-home buyers and existing owner occupiers.
Economists at three of the four big banks have just lifted their forecasts for Australian dwelling prices in 2021 after a stronger-than-expected surge in the first half of the year, with price growth expected to slow down in 2022.
Commonwealth Bank of Australia economists now expect national prices to jump by 20% this year, while National Australia Bank and Westpac economists forecast gains of 18.5% and 18%, respectively.
While the RBA and the Australian Prudential Regulation Authority do not target housing prices, they are closely watching lending standards and trends in housing borrowing.
Mr Lowe said there were no signs of lending standards deteriorating at the moment.
He said should the Council of Financial Regulators intervene in the market, the first step would be to raise the minimum interest rate banks use when deciding how much to lend to borrowers.
The regulators were also considering imposing loan-to-valuation or debt-to-income restrictions on lenders’ portfolios.
“We’re not at the point that those restrictions are needed but I couldn’t rule out that point emerging within the next year, but time will tell,” Mr Lowe said.
Mr Ryan said macroprudential restrictions are not imminent, although the situation could change if very strong credit growth and housing price growth continue for several months.
“The lockdowns mean that regulators are very unlikely to implement measures that will slow the housing market while there are other negative shocks going on in the economy,” Mr Ryan said.
While low interest rates are pushing up prices, Mr Lowe said the main drivers of housing prices over time are not within the RBA’s control.
“If the society wants to do something about housing prices, it’s really about the value of the land embedded in each house,” Mr Lowe said.
“The tools are not within our hands, they’re within the hands of governments. It’s about urban design, planning laws, transportation and taxation.”
Lockdowns having short-term impact on housing
In its statement, the RBA said housing price growth has moderated a little since the reintroduction of stay-at-home orders in Sydney, and auction market withdrawals have increased.
“The supply of properties newly listed for sale had been around the top end of the range of the past few years, although listings have declined over the past month alongside restrictions on activity in some markets,” the RBA said.
“Total listings declined further as properties have continued to clear quickly from the market, indicating that demand has remained strong relative to the volume of properties listed for sale.”
Mr Ryan said many sellers are holding off listing on the market because they want to sell their properties under optimum selling conditions, and sales had started to fall in Sydney.
“The market in Sydney is going to go into a bit of a dormant state,” Mr Ryan said.
“Some properties will sell and I don’t think there will be bargain conditions. Sellers know that the market is hot.
“Prices are likely to hold up, you’ll get most sales being delayed and everyone will kind of wait out the winter and sell afterwards.”