RBA on hold as mortgage rates and loaning standards take centre stage

The Reserve Bank of Australia has dodged concerns surrounding rising mortgage rates, falling property prices and a lending crackdown to extend its record-breaking streak without moving the cash rate.

The central bank on Tuesday opted to leave the official cash rate on hold for the 21st time in a row at 1.5 per cent – its lowest level on record.

An unchanged result from the first RBA board meeting for the new financial year was guaranteed by the economists – Westpac’s head of rates strategy Damien McColough said there was “absolutely no chance of a change in policy settings” to occur on Tuesday – and other economists have now pushed back their rate move forecasts.

But while the RBA appears content to wait as long as necessary before shifting official interest rates, several factors – including a house price correction, a lending slowdown, and the prospect of higher mortgage rates – have become key talking points.

Wages remain weak and debt levels continue to be the main cause for concern, but consumer spending may be an area of increasing focus, according to AMP chief economist Shane Oliver, who said a rate cut can’t be ruled out as the RBA’s next move.

The clear risk is that rising mortgage rates and tighter credit conditions prompt [property] prices to fall at a much faster pace over the next year or so.Capital Economics chief economist Paul Dales

“Ongoing home price falls in Sydney and Melbourne will depress consumer spending as the wealth effect goes in reverse,” Dr Oliver said.

“It’s consistent with our view that the RBA will leave rates on hold out to 2020 at least.

“Home price weakness is at levels where the RBA started cutting rates in 2008 and 2011, so while it’s not our base case we still can’t rule out the next move in rates being a cut rather than a hike.”

And while house prices in Sydney may be expected to drop as much as 15 per cent from the September 2017 peak to 2020, according to Dr Oliver, the national average price fall is likely to be a top-to-bottom fall of about 5 per cent.

Looking at mortgage rates and lending, rather than prices

But house prices may be a side issue for the central bank, with out-of-cycle mortgage rate rises and falling lending data controlling the spotlight this month.

“The Reserve Bank of Australia probably isn’t too concerned by the further small fall in house prices in June,” Capital Economics chief Australia and NZ economist Paul Dales said, pointing to CoreLogic’s latest house price data which show prices haven’t risen for 11 months.

“But the clear risk is that rising mortgage rates and tighter credit conditions prompt prices to fall at a much faster pace over the next year or so.”

A sustained attack on risky lending practices through tighter legislation and a royal commission has seen mortgage borrowing – particularly interest-only and for investors – slump, with Mr Dales arguing policymakers “have successfully engineered a soft landing in the housing market”.

“The clear danger is that this soft landing turns into something more like a hard landing,” he said.