The RBA held the official cash rate at 0.1 per cent on Tuesday, but the expiry of the central bank’s term funding facility (TFF) is expected to yield upwards pressure on longer-term fixed mortgage rates. Moreover, above-average lifts in investor lending are increasing the risk of regulatory response.
The RBA’s TFF expired last week, with $188 billion of the $209 billion taken up, and while the central bank is convinced this will support low borrowing costs until mid-2024, experts are questioning the bank’s rationale.
According to CoreLogic’s Tim Lawless, with the expiry of the TFF, lenders may be tempted to seek out alternative funding sources, which in turn exerts pressure on mortgage rates.
Moreover, Mr Lawless hinted that both the RBA and APRA could shortly place additional focus on investor credit growth, which has been rising at an above average rate over April and May based on RBA’s own financial aggregates.
ABS data, too, puts the growth of investor lending at 70 per cent over the six months to May, which is more than double the rate of owner-occupier credit growth.
Noting the RBA’s confidence in housing prices, as well as the positive flow-through to household wealth and spending, Mr Lawless is confident that the rate of growth in the investors’ share of loan approvals is increasing the risk of a regulatory response.
“With new lending to investors now rising at a substantially faster pace than for owner-occupiers, the RBA may be less comfortable with housing market conditions and the potential for financial instability relating to a lift in housing-related debt and a worsening dwelling value-to-income ratio,” Mr Lawless explained.
In his opinion, further COVID outbreaks and associated lockdowns aside, “the most significant headwind facing housing markets remain tighter credit policies and higher mortgage rates”.
And while neither of these events look to be imminent at the moment, a growing number of private sector commentators are forecasting the cash rate will lift earlier than this, potentially as early as late 2022.
“From a credit policy perspective, a more substantial rise in investor activity, a further rise in household debt or any material slip in lending standards could be the trigger for tighter credit policies,” he explained.
In the meantime, he alerted to the high likelihood that activity will taper off as affordability constraints and higher supply impact the market.
“If credit tightening policies are implemented, or interest rates shift higher, there will be a potentially sharper slowdown,” Mr Lawless said.
According to CoreLogic, national home values rose 1.9 per cent in June, taking annual growth to 13.5 per cent for the financial year.
Although the rate of growth has eased a little from the recent peak in March, growth conditions remain broad-based, with the large majority of regions around the country recording higher housing prices.
A house refers to a building or property used as living quarters or an individual’s place of permanent or temporary residence.