RBA Governor Phil Lowe monitoring the impact of house price falls
And that’s why Lowe is taking a tough line on inflation. Not only did the Reserve Bank board raise its cash rate by a more-than-expected 50 basis points at its meeting on Tuesday, but Lowe signalled “further steps” were likely in coming months as the central bank moved to normalise its policy settings.
That’s because, even after the latest rate hike, the cash rate is still at 0.85 per cent – well below the neutral rate, which economists estimate is around 2.5 per cent. And that means monetary policy is still providing considerable support for the economy.
Of course, as the Reserve Bank hikes interest rates, it will be keeping a close eye on how households cope with rising mortgage payments.
Now, on the face of it, households should not be rattled. A large cohort of home loan borrowers have accumulated impressive amounts in their mortgage offset accounts.
What’s more, huge numbers of home loan borrowers took advantage of ultra-low fixed rate loans that were on offer during the pandemic. Some 40 per cent of home loans are fixed rates.
And while some are due to mature this year – which means that people face the prospect of higher home loan rates in the short term – a much larger number don’t mature until next year, or even 2024.
That means that many home loan borrowers won’t even feel the sting of higher rates for a year or so.
Still, there is a major risk that a sharp fall in house prices could batter household confidence, especially as it comes at a time when consumers are already facing higher prices for food, energy and petrol.
As a result, the Reserve Bank will be keeping a close watch on whether households remain buoyant, despite the squeeze on their budgets from rising inflation and higher home loan repayments, and the negative wealth effect from falling house prices.