Reserve Bank of Australia Governor Michele Bullock says the housing market has eased “by more than we had anticipated,” even as she left the door open to further interest rate rises.
Speaking at the Anika Foundation Fundraising Lunch in Sydney on 28 July, Ms Bullock said the property market had softened more than the bank’s May forecasts predicted.
She attributed this to a range of factors.
“This appears to reflect a range of factors, including recent policy developments affecting the housing market and a general softening in housing market sentiment,” she said.
Despite that, Ms Bullock said the pullback in prices had so far been modest following a period of strong growth, with price declines concentrated in Sydney and Melbourne.
Even in those two cities, she said, prices “remain around where they were before interest rates started to rise in February this year.”
Ms Bullock also sought to reassure on financial stability, noting negative equity remained “very limited, affecting less than 1% of borrowers,” with only a small share of that group facing severe repayment difficulty.
“This is not to downplay that this would be very stressful for those people that are affected, but it does indicate that financial stability risks are contained and borrowers in aggregate have built up considerable savings buffers over the years,” she said.
She stressed that house prices are not a target of monetary policy in themselves.
“Monetary policy doesn’t target housing prices,” she said, adding that what matters is how price movements affect household spending, investment decisions and inflation.
The comments come as economists debate whether the RBA’s August board meeting is live for a rate rise. The cash rate has already been increased three times this year – in February, March and May, totalling 75 basis points – after inflation proved stickier than forecast.
Ms Bullock said inflation remained too high and did not rule out a further increase.
“If it looks like inflation is not coming down, then I think the board have some difficult decisions to make in terms of raising interest rates,” she said.
Consumer price index figures for the June quarter, due Wednesday, along with updated forecasts due in August, are expected to be key inputs into the board’s next decision.
Sally Tindall, Canstar’s data insights director, said lenders continued to cut new-customer rates even as the prospect of an RBA hike loomed.
“An RBA rate hike in two weeks’ time is still seen as a chance rather than a probability by many economists; however, with inflation continuing to put pressure on both households and the central bank, we could end up on the other side of August with mortgage hikes rather than cuts,” Ms Tindall said.
Canstar modelling shows a borrower with a $600,000 loan would face an extra $92 a month if the RBA lifts the cash rate by 0.25 percentage points in August, in line with Westpac’s forecast.
Combined with the three earlier hikes this year, the total increase in monthly repayments would reach $364, taking repayments on that loan size to $4,052 a month.