RBA holds interest rates as Sydney and Melbourne property recovers

The resurgence in Sydney and Melbourne housing values was likely a key topic of conversation amongst the RBA Board at today's meeting.

In line with rate cuts in June and July, housing values in Australia's two largest cities have recorded a lift.

Dwelling values rose 1.9% and 1.8% in Sydney and Melbourne over the past three months.

August data showed CoreLogic's national index recorded its first month on month rise since October 2017 and five of the eight capital cities saw dwelling values increase.

Clearly housing market conditions are responding to lower interest rates as well as the recent loosening of loan serviceability rules from APRA and the positive influence of the stable federal election outcome.

The recent step up in the pace of value growth is likely to raise some concern that the lowest mortgage rates since the 1950s is fuelling renewed housing market exuberance at a time when household debt remains around record highs.

High levels of household debt are manageable while interest rates are very low.

However if debt levels remain elevated when interest rates eventually rise, the risk is that households will need to dedicate more of their income towards servicing their debt and less towards spending.

The recovery trend is still very early and there is the potential for the pace of growth to slow as advertised stock levels rise in line with spring, but no doubt the RBA will be keeping a close eye on housing market conditions.

If the recent acceleration in housing value growth is sustained over coming months, we could potentially see additional credit policy levers pulled, aimed at keeping a lid on household debt.

Limiting lending to borrowers on high debt to income ratios could be one option, or introducing hard limits on high LVR lending could be another mechanism that would reduce the risk of a further build up in household debt whilst at the same time allow borrowers to access housing credit and take advantage such low interest rates.

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