BILL EVANS: Restrictions to slow Australia's housing market are coming

A crowd of bidders at an auction. Source: iStock

After reducing interest rates in spits and spurts since 2011, most economists think the RBA’s next move on interest rates will be higher, with the vast majority viewing it as something likely at some point next year.

Higher commodity prices and export volumes, an upturn in non-mining business investment, a slightly lower Australian dollar, booming property prices in Sydney and Melbourne and a small acceleration in consumer spending are seen by many as supportive of not only growth but also inflation in the quarters ahead, laying the platform for gradual rate hikes from the RBA in the years ahead.

And, with RBA governor Philip Lowe striking a more optimistic tone than his predecessor Glenn Stevens since taking over in September last year, it’s helped to further cement the view that hikes, rather than cuts, are now more likely.

While many in markets have now embraced this view, not everyone is convinced they are on the horizon.

Bill Evans, Westpac’s chief economist, is one man yet to be convinced, suggesting in a note today that rather than hikes, the risk for Australian interest rates next year is that they will be cut.

And it’s Australia’s east coast housing market — seen by many as a reason to hike rates — as one factor that could see rates cut again.

After some massive gains in Sydney and Melbourne house prices over the past 12 months, he thinks that the risk of tighter macro-prudential measures from Australia’s banking regulator, APRA, are clearly building at present, particularly with the RBA seemingly reluctant to cut rates further for fear of encouraging further borrowing and house price growth.

“Given that both Sydney and Melbourne prices are up 14% the RBA and APRA may be considering even tighter macro prudential policies,” said Evans, using a six-month annualised rate based off CoreLogic data released earlier this week.

While not everyone shares this view, it’s easy to see why some think that it’s the Sydney and Melbourne property markets, rather than the broader Australian economy, that is dictating monetary at present.

Helping to fuel that belief, Philip Lowe told parliamentarians on Friday last week that while unemployment was “a bit high” and inflation “a bit low”, cutting interest rates would largely result in more borrowing for housing, pushing up prices even further.

That’s two policy mandates that the RBA could help by reducing rates but can’t because of housing, seemingly playing into the hands of those who think that further regulatory measures should be introduced to reduce housing’s influence on determining policy settings.

Given previously implemented macroprudential measures have succeeded in slowing investor housing credit and house price growth in the past, it’s easy to see why Evans, and others, believe even tighter measures will deliver the same outcome, or more, should they be introduced.

He thinks that they will, suggesting that it will likely occur in the second half of this year.

Given that view, accompanying previous concerns about the growth outlook for the Australian economy in 2018, Evans says that means the risk for Australian interest rates next year remains to the downside.

“If, as we expect, the Bank will get around to adopting additional macroprudential policies to slow housing in the second half of 2017 the stage will be set for another year of steady rates in 2018,” he says.

“With the economy slowing and macro prudential policies further tightening housing markets, the risks to rates in 2018 will be to the downside rather the upside as currently expected by markets.”

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