Rocketing house prices unlikely to force rate increase

Rocketing house prices unlikely to force rate increase

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The Reserve Bank of Australia has reiterated its earlier claim that cash rates will not be lifted until 2024 at the earliest, despite rocketing house prices.

The confirmation comes in spite of the fact the country has enjoyed a faster than expected economic recovery following the downturn caused by the COVID-19 pandemic, with news that the economy expanded by 3.1 per cent in the December quarter.

It follows news released from CoreLogic’s national home value index which revealed that Australian home values surged 2.1 per cent higher in February, the largest month-on-month change since August 2003.

Home loans also increased 10.5 per cent over January to $29 billion, taking them 44.3 per cent higher than at that time in 2020.

Speaking shortly after announcing the RBA will hold the cash rate at a record low of 0.1 of a percentage point, RBA governor Phillip Lowe confirmed the Board will not increase the cash rate until actual inflation is sustainably within the two to three per cent target range.

“For this to occur, wages growth will have to be materially higher than it is currently. This will require significant gains in employment and a return to a tight labour market.

“The Board does not expect these conditions to be met until 2024 at the earliest,” he said.

However, many finance experts are predicting that the housing price surge and broader economic recovery could force the RBA’s hand sooner, with some suggesting it may happen as soon as the second half of 2022.

So, what does this mean for home buyers or existing strata owners looking to refinance?

The Government recently proposed loosening responsible lending laws in a move designed to supercharge the COVID recovery.

The changes would remove lenders’ obligation to ensure home loans issued are suitable for borrowers, placing that responsibility more squarely on borrowers’ shoulders.

Some fear that with Australian households already holding billions of dollars in debt, any movement on the official cash rate from the RBA could trigger a “mortgage arrears time bomb”.

However, others argue the laws penalise good borrowers by forcing lenders to turn down viable lending.

In the bank’s statement on Tuesday, the RBA’s Phillip Lowe voiced support for the current lending settings.

“Lending rates for most borrowers are at record lows and housing prices across Australia have increased recently,” he said.

“Housing credit growth to owner-occupiers has picked up, but investor and business credit growth remain weak. Lending standards remain sound and it is important that they remain so in an environment of rising housing prices and low interest rates.”

Despite these favourable conditions, smart economists are also warning against panic buying when it comes to property investment.

In an interview published by Yahoo Finance, RateCity research director Sally Tindall noted that while low rates are driving current prices north, predictions of up to 20 per cent property price rises over the next couple of years are pushing people to panic buy.

Tindall said that while borrowers are “rattled” at the risk of being priced out, they need to exercise caution.

“If you are looking to buy a home, don’t just work out the monthly mortgage repayments, look at how much debt you’re willing to take on,” she said.

“Interest rates are keeping mortgage repayments manageable now, but home loans are a 30-year commitment. The last thing you want is to be saddled with debt you can’t afford to repay in five- or ten-years’ time.

“In this unpredictable life, jobs can be lost, or incomes slashed without warning. When it comes to a home loan, don’t bite off more than you can chew.”

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