RBA likely to keep rates on hold this year as continuous rise in Australia’s house price remains a cause of concern

Australia’s house prices have reaccelerated towards the end of 2016 after decelerating through most of 2016. In Sydney and Melbourne, prices of house have risen by a cumulative 5.1 percent and 5.9 percent in the last three months respectively, pushing the annual growth to a 14-month high of 17 percent and 15 percent respectively. This has come along with robust auction results, with clearance rates throughout the two cities essentially returning to 2015 boom levels, noted ANZ in a research report.

The robust demand for housing is also clear while looking at housing finance. The recent November data indicated that monthly finance approvals rose 7.4 percent year-on-year, the most robust pace of growth since August 2015. Housing investors have mostly driven this growth. Investor finance approvals have risen robustly in recent months, particularly in the major states of Victoria and New South Wales. Therefore, the investor share of new finance is rising again towards the peaks observed in 2015.

Given the recent rebound in investor finance commitments, it is worth noting that the stock of investor borrowing is still expanding well below APRA’s 10 percent year-on-year target. APRA’s monthly banking stats for November indicate that while the stock of investor debt throughout the four major banks has been increasing, annual growth throughout the four currently sits at just 3.6 percent year-on-year, stated ANZ.

The ongoing price growth is expected to be closely observed by the Reserve Bank of Australia. Given its increased focus on financial stability, the rebound in house price growth to double-digits would be of certain worry. If this price growth continues, it might be a drag on the possibility of additional rate cuts by the central bank as it would be hesitant to further boost the housing market. However, the RBA is expected to keep the rates unchanged in 2017, added ANZ.