The decision to leave interest rates on hold was easy for the Reserve Bank board yesterday – there is no reason for a cut and certainly no reason for an increase. The big discussion, as we pointed out on Monday, was the outlook for housing.
And housing’s dominance of the discussion was shown by an extra new paragraph devoted to it, and the moves by APRA and ASIC to crack down and control lending, especially interest only loans.
"Growth in household borrowing, largely to purchase housing, continues to outpace growth in household income. By reinforcing strong lending standards, the recently announced supervisory measures should help address the risks associated with high and rising levels of indebtedness. Lenders need to ensure that the serviceability metrics that they use are appropriate for current conditions. A reduced reliance on interest-only housing loans in the Australian market would also be a positive development,” the new paragraph in yesterday’s statement from governor Phil Lowe, read.
The bank also included this paragraph:
"Conditions in the housing market continue to vary considerably around the country. In some markets, conditions are strong and prices are rising briskly. In other markets, prices are declining. In the eastern capital cities, a considerable additional supply of apartments is scheduled to come on stream over the next couple of years. Growth in rents is the slowest for two decades.”
That compares to the full paragraph in the post March meeting statement from Governor Lowe:
"Conditions in the housing market vary considerably around the country. In some markets, conditions are strong and prices are rising briskly. In other markets, prices are declining. In the eastern capital cities, a considerable additional supply of apartments is scheduled to come on stream over the next couple of years. Growth in rents is the slowest for two decades. Borrowing for housing by investors has picked up over recent months. Supervisory measures have contributed to some strengthening of lending standards.
Taken as a whole we fond that the “supervisory measures (that) have contributed to some strengthening of lending standards” has been dropped, or rather expanded to the phrase “By reinforcing strong lending standards, the recently announced supervisory measures”
And there was the direction to lenders about standards: "Lenders need to ensure that the serviceability metrics that they use are appropriate for current conditions," Dr Lowe said.
The new second last paragraph in Governor Lowe’s statement is an endorsement by the RBA of the moves by APRA and ASIC. The paragraph should also been seen as representative of the tone of the bank’s first Stability Review of the year, to be released on April 13.
We should expect a discussion about why there was the need for a new round of ’supervisory measures’ so soon after the first round in late 2014 and early 2015 slowed the growth in investor lending, and cracked down on interest only loans, only to both grow rapidly in the closing months of 2016.
The only answers as to why that growth occurred is that banks and other lenders ignored the earlier crackdown, and perhaps that took regulators like APRA by surprise.
A rate rise remains off the table because the RBA at the moment sees no need for it – although if the housing sector doesn’t respond quickly to the latest crackdown, it wouldn’t surprise to see some sort of ‘jawboning’ from regulators about tougher measures, and a rate rise would be hinted at, or ruled out.
The odd economist and analyst sees the chances of a further rate cut, but not with housing in Sydney and Melbourne in particular booming and close to overheating.
The AMP’s chief economist, Dr Shane Oliver says the next move in rates will be in late 2018 and will be a rate hike.
“The RBA has left interest rates on hold, he wrote yesterday. “The arguments to cut or hike rates are evenly balanced and we can’t see an official rate hike until second half 2018… For the RBA to hike rates just to slow the Sydney and Melbourne property markets at a time of softness elsewhere would be madness.
“But various threats to the hot Sydney and Melbourne markets are growing and point to slowing price gains,“ Dr Oliver added.
