Despite a supercharged property market due to historically low interest rates, the Reserve Bank of Australia (RBA) has today decided to keep Australia's official cash rate on hold at the record-low level of 0.1 per cent. In his monetary statement, RBA Governor Philip Lowe noted rising property prices but maintained that inflation was not yet high enough to justify a rise in interest rates.
"Housing prices are continuing to rise, although turnover in some markets has declined following the virus outbreak," Mr Lowe said.
While raising interest rates has been a tool in combatting rising property prices in the past, interest rate movement is also used to manage inflation, a key marker to the health of an economy. It is a delicate balancing act that the RBA must consider - raising rate too quickly to cool a hot property market can push inflation lower in an already strained economy. Mr Lowe, in a speech on the state of the economy, said an increase in interest rates to deal with surging house prices was not on the RBA’s agenda, arguing such a move would “mean fewer jobs and lower wages growth”.
So, the big question is - what will happen to property prices if it remains uncontrolled?
Data from the Australian Bureau of Statistics on Tuesday showed a 6.7 per cent jump in the June quarter in its measure of house prices. It was the largest three-month increase on record and took the annual increase to 16.8 per cent.
The average price of a house in Australia is now a record $835,700, up from $689,400 a year ago.
In Sydney, prices rose by 8.1 per cent in the quarter to be 19.3 per cent up over the year. In Melbourne, they increased by 6.1 per cent in the quarter for annual growth of 15 per cent.
Canberra house prices, up 19.1 per cent over the past 12 months, are now increasing at their fastest rate on record. The slowest capital is Adelaide where prices still increased by 5.3 per cent in the quarter to be 14.2 per cent up over the year.
Without raising interest rates, the only options available in stemming rising property prices will be taxes, public policies or tightened scrutiny on lending criteria, the latter being the simplest to implement. A tightened and toughened lending criteria will result in fewer borrowers in the market.
References
Stuart Marsh (2021, Oct 5) "Australia's interest rate remains on hold at the historic low level of 0.1 per cent"
Shane Wright (2021, Sep 15) "RBA says surging house prices are a government problem"
