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The RBA Governor, Phillip Lowe, suggested that when interest rates do increase, it “will come as a shock to some people”.
On this, Lowe is spot on.
It has been 7 and a half years since the last interest rate rise from the RBA which means that those who have taken on debt since November 2010 have only see their interest rate stay the same or move lower.
First home owner grants and the people's bank plan push house prices higher
The Reserve Bank of Australia must be dismayed at the policies from several state governments that have increased cash payments to first home buyers and propose a people’s bank that, among other things, will make it easier for potential owner-occupiers to access credit and bid for a house.
The last thing potential property buyers need is easier access to credit and cash handouts to boost demand. Indeed, the RBA and other regulators are still working the other way, keeping policy tight so that credit growth continues to slow and with that, there will be some rebalancing of household balance sheets away from ever increasing debt.
The first home owners grant increases in NSW and Victoria have underpinned prices, with the number of first home buyers rising around 35% over the past year. In addition to adding to demand for housing, these policies have also been costly to the state budget position.
Without this surge in first home buyer activity, house prices would have no doubt been weaker still and that may have allowed the RBA to be more proactive in setting monetary policy with an eye to boosting demand and lowering unemployment which would impact positively on wages growth and in time see inflation return to the target.
One of the important economic issues that will likely have a significant impact on the economy and policy, is the fall in house prices that is steadily unfolding.
Outside Darwin and Perth, where prices have slumped by over 20% and 10% respectively from their peaks, the falls are not yet substantial, but they could be signalling the early stages of a fall in household wealth which, if sustained, would have consequences for the economy.
In the two mega-cities, Sydney and Melbourne, prices are down 4% and 1%, respectively, from the late 2017 peaks and according to the Corelogic price data, there is no evidence that the falls in prices are abating.