RBA Puts Banks on Notice

Reserve Bank of Australia governor Philip Lowe has issued a stern warning to lending institutions as concern grows over the disparity between surging house prices and low wage growth in Australia.

In his speech at a business summit this week Lowe warned that soaring house prices coupled with low population growth and stagnated wage growth was not a healthy combination, and “raised concern for many people”.

“Looser [lending] standards would increase medium-term risks and add to the upward pressure on prices, so [it] would be of concern,” Lowe said.

“Reflecting this, the Council of Financial Regulators has indicated that it would consider possible responses should lending standards deteriorate and financial risks increase.”

Lowe cited the “many moving parts” impacting the house price boom including record low interest rates, a shift in housing preferences, government stimulus packages and slow population growth.

“Time will tell as to how these various factors ultimately balance out, but history suggests that shifts in population growth can have large effects on the housing market.”

Wage growth is currently at 1.4 per cent year on year, the lowest on record according to Lowe. He said that for inflation to be sustainably within the target range of 2 to 3 per cent, wage growth needed to be “materially higher than it is currently”. He also indicated interest rates would not rise without a significant drop in unemployment figures from 6.4 per cent to 4 per cent.

He said while the Reserve Bank did not target house prices it could use other macro prudential mechanisms, such as tightening lending criteria, to cap exuberance.

“We are not at this point. But we are watching carefully,” Lowe said.