Economy Charts Strong Growth as RBA Remains Watchful

While Australia’s housing market is showing no signs of slowing down, economists are worried the falling net migration and weakening housing affordability hold longer-term risks.

Minutes from this week's Reserve Bank board meeting noted that “low interest rates had been one of the factors contributing to increase in demand for housing, alongside other policies such as government grants”.

But it stopped short of raising concerns about recent rises in home values, saying it would continue to monitor lending trends rigorously.

Moody’s analyst Tanya Tang said the record-high housing finance approvals and construction approvals had been bolstered by low interest rates, government stimulus packages and a recovering economy.

Tang said while higher prices could reinforce a housing recovery through attracting investors and improving banks’ collateral positions, they would also weaken housing affordability, which “poses medium-term risks for new loan credit quality”.

“Although the government's HomeBuilder subsidy program has now expired, the extension of the construction deadline will continue to support sector activity for the next year or more,” she said.

Tang said investor interest was reawakening but ongoing falling migration figures would cap near-term apartment demand during the medium term.

Capital Economics’ Ben Udy said he anticipated the Australian Prudential Regulation Authority would “reimpose some lending restrictions in the years ahead” in response to an expected loosening of lending standards.

Udy said he forecast an extension to the quantitative easing program in June, and that he believed the central bank would want to continue stimulus in the months ahead.

“We expect the bank to announce another $100-billion extension to its asset purchase program in June and keep rates on hold until late 2023,” Udy said.

CommSec’s chief economist Craig James said the Reserve Bank was in “wait-and-see mode” while owner-occupiers were driving new lending commitments.

He said banks had increased higher loan-to-value lending as government incentives drove the rapid rise in the number of first-time home buyers.

“The Covid-related contraction in net migration and weakening housing affordability pose mid-term risks to housing demand and the credit quality of new loans,” James said.

“The Australian Prudential Regulation Authority may reintroduce macro prudential lending restrictions if house prices continue to rise rapidly or if there is any evidence of looser lending standards.”