Housing credit crunch feared as RBA keeps rates on hold

The Australian 12:00am August 8, 2018

Adam Creighton, David Uren

Scott Morrison says the economy faces an “own goal” if the financial services royal commission causes a credit crunch, with his warning coming as the Reserve Bank governor highlighted “changed ­dynamics” in the ­increasingly fragile housing market.

The Treasurer said he was ­relaxed about house prices, which are falling in Sydney and Melbourne at an annualised pace of about 5 to 10 per cent, but urged vigilance to avoid a sharp drop in home loan growth.

“We must be very careful to avoid that. We are being very careful about that in terms of how we handle the regulatory ­response,” he said at a business lunch in Melbourne yesterday. “There are concerns that the wrong response to what we’re seeing in our banking or financial system could further constrain credit, or cause an economic ‘own goal’ in Australia.”

He was referring to the possibility the royal commission could prompt banks to dramatically tighten their lending standards.

His comments came as the ­Reserve Bank board announced that the cash rate would remain at 1.5 per cent this month, bringing to two years the period of unchanged policy — the longest since the central bank began targeting inflation in the 1990s.

“Conditions in the Sydney and Melbourne housing markets have continued to ease and ­nationwide measures of rent ­inflation remain low,” governor Philip Lowe said, echoing some of the Treasurer’s concerns.

Uncertainty about the housing market, inflation and China’s growth prospects convinced the board to buck a global trend towards higher official interest rates.

The Bank of England increased its official interest rate to 0.75 per cent last week, following several increases in the official rate in the US. The RBA last changed the cash rate in August 2016, cutting it 0.25 percentage points to 1.5 per cent.

“Growth in China has slowed a little, with the authorities easing policy while continuing to pay close attention to the risks in the financial sector,” Dr Lowe said, a likely reference to potential damage from any trade war between the US and China.

Paul Dales, chief economist at Capital Economics, said interest rates were unlikely to rise until late next year as the extent of the housing downturn became clear. “If our fear that the housing market is on the cusp of the longest and deepest downturn in Australia’s modern history proves correct, then interest rates may not rise until some time in 2020,” he said. The Australian dollar jumped slightly on the announcement, to about US74c.

Mr Morrison said the overheated housing markets in the two big eastern capital cities had needed the intervention of the banking regulator APRA. “This has been a necessary cooling in those markets because it was putting enormous pressure on the level of household debt, which was actually risking our AAA credit rating,” he said. He said rising household debt had been singled out as a concern by the ratings agency analysts, adding that APRA’s tightening of bank lending standards on investor housing had been “the most calibrated ­intervention you could imagine”.

Dr Lowe remained optimistic about wage growth, which has ­defied repeated hopes of an ­increase, sitting at about 2 per cent a year. “The rate of wages growth appears to have troughed and there are increased reports of skills shortages in some areas,” Dr Lowe said. “GDP growth is expected to average a bit above 3 per cent in 2018 and 2019. This should see some further reduction in spare capacity.”