OECD: Australia Needs To Lift Interest Rates To Deal With Housing Prices

Ian Forsyth/Getty Images

Australia’s Reserve Bank needs to lift interest rates in the first half of 2015 to curb unwieldy house price increases and prevent them “unwinding sharply”, the Organisation for Economic Cooperation and Development says.

“Short of negative surprises, withdrawal of monetary stimulus should start in the second quarter of 2015,” the OECD says.

“The booming housing market and mortgage lending will require continued close attention by authorities.

“There is room for both fiscal and monetary policy to provide support in the event of unexpected negative economic shocks.”

Behind the advice, which is at odds with many in the market championing for the RBA to cut rates further, the OECD said is the combination of a declining household savings rate and surging property prices at a time when Australia’s economic growth is slowing as it transitions out of a mining investment boom.

Earlier this month Credit Suisse made a devastating argument for Australia’s interest rates to be cut to as low as 1.5%, a view which is being driven by low confidence and consistently weak growth.

The OECD forecasts the Australian economy will expand at a below average rate of 2.5% in 2015, before picking up slightly to 3% in 2016 in line with consumption and exports.

However, the agency says the historically low cash rate, which has been on hold at 2.5% since August 2013, is fueling a “search for return” among property investors.

Australia’s housing prices have increased by more than 11% in the year to August with prices in Sydney and Melbourne markets growing more than 16% and 12%, respectively. A lot of the growth is being driven by investors, a trend which has been noted in the rise in investment loans written. In October the RBA deputy governor Phillip Lowe said almost 45% of all loan approvals were granted to investors.

“This requires close oversight of asset-market developments, particularly rising housing credit, which is now being driven by investors,” the OECD says.

The RBA has stated it is considering implementing tighter borrowing restrictions on investors, something the OECD said is needed.

“Further prudential measures on mortgage lending should be considered as a targeted means to cool the market, thereby heading off risks to financial stability,” the OECD said.

These OECD charts show how Australia’s economic environment is changing, with falling mining investment and weakening commodity prices, coupled by rising house prices and lower household saving:

Here are the OECD’s economic outlooks for Australia over the next two years.

NOW WATCH: Money & Markets videos

Business Insider Emails & Alerts

Site highlights each day to your inbox.

Follow Business Insider Australia on Facebook, Twitter, LinkedIn, and Instagram.