Housing market strong as Reserve Bank keeps interest rates on hold

Record low borrowing costs will continue to drive strong buyer demand and housing price growth, as the Reserve Bank of Australia keeps official interest rates on hold.

The RBA board kept the cash rate and other key policy rates at 0.1% after its monthly meeting on Tuesday.

RBA governor Philip Lowe said lending rates for most borrowers are at record lows.

“Housing markets have strengthened further, with prices rising in all major markets,” Mr Lowe said in a statement after Tuesday’s meeting.

“Housing credit growth has picked up, with strong demand from owner-occupiers, especially first-home buyers. Given the environment of rising housing prices and low interest rates, the Bank will be monitoring trends in housing borrowing carefully and it is important that lending standards are maintained.”

Mr Lowe repeated that the RBA board will not increase the cash rate until actual inflation is sustainably within its 2-3% target range and it did not expect the required economic conditions to be met until 2024 at the earliest.

While the RBA and the Australian Prudential Regulation Authority do not target housing prices, regulators are closely watching lending standards as property prices surge on the back of ultra-low rates, unprecedented buyer demand and a low supply of properties for sale.

Buyers scramble to take advantage of low rates

Realestate.com.au economist Paul Ryan said the RBA’s confirmation that the cash rate will stay at very low levels until at least 2024 provides certainty for borrowers that mortgage rates will stay low for several years.

“Low rates, and the expectation they will remain low for several years, have been a key driver of the increases in housing prices over the past year,” he said.

“Just over that period, the amount new borrowers have been able to borrow has increased by almost 20%.”

Mr Ryan said low rates have been the main driver of the increase in buyer demand, but not the only one.

“Incentives for home building and first-home buyers have brought forward buying activity and a reassessment of housing needs in the post-pandemic world have led to some searching for larger homes or homes in locations with greater lifestyle amenity,” he said.

“Buyer demand will remain strong while low borrowing costs make purchasing good value relative to renting, which remains the case for most properties, particularly outside of inner Sydney and Melbourne.

“Many existing home owners may join the market as price gains provide equity for upgrades,” he added.

Homes have been selling at record speeds as buyers rush to snap up properties.

Property prices are tipped to surge by 20% over 2021 and 2022, with economists at the big four banks forecasting gains of at least 10% and as much as 17% this year. The rapid pace of growth in early 2021 is expected to slow down, particularly next year.

“Some buyers will definitely be feeling a fear of missing out,” Mr Ryan said.

“Particularly for current renters, strong price growth makes saving a 20% deposit and stamp duty increasingly difficult.”

New home loan commitments rose 5.5% to a record $30.2 billion in March, according to the latest Australian Bureau of Statistics data released on Tuesday. The number of owner-occupier first-home buyer loans dropped by 3.1%.

Three-quarters of the 40 experts surveyed by comparison site Finder expect home loan borrowing will surge further over the next six months as buyers scramble to take advantage of low interest rates.

“Property demand is continuing to run rampant, with buyers spurred on by a combination of fear of missing out and low interest rates,” Finder head of consumer research Graham Cooke said, adding that many longer-term fixed rates are starting to rise.

“The last six months saw the highest amount borrowed to purchase housing over any six month period in history. What economists have told us is that the next six will be record-breaking.”

More listings as seller confidence rises

While demand continues to outstrip supply, listings are starting to rise as vendors feel more confident and more owners take advantage of the strong selling conditions and higher prices.

A realestate.com.au survey conducted in April put seller confidence at its highest level since the beginning of the coronavirus pandemic. Nationally, 48% of respondents believe now is a good time to sell property, a 10% increase compared to December 2020.

While low interest rates continue to bolster demand, the survey showed increasing housing prices have impacted buyer confidence. In April, 35% of respondents said now is a good time to buy property, down from 48% in December.While owner-occupiers have dominated the market, investor activity is increasing. Lending to investors jumped by 12.7% in March.

ABS head of finance and wealth Katherine Keenan said investor lending has seen a sustained period of growth since the 20-year low reached in May 2020. “The rise in March is the largest recorded since July 2003 and was driven by increased loan commitments to investors for existing dwellings,” she said.

Mr Ryan said investor activity will likely continue to grow.

“Low rates are important for investors, but many are likely responding to increased certainty about when immigration will return after the pandemic, reducing vacancy risk,” he explained.

SOURCE: https://www.realestate.com.au/