Nell Matzen - 3 Aug, 2021

RBA holds August cash rate, but banks increase interest rates

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The Reserve Bank of Australia (RBA) will hold the August cash rate at 0.10% but lenders may be forced to increase interest rates to match the growth of property prices.


Following August’s Monetary Policy meeting, the Reserve Bank of Australia (RBA) has announced that the August cash rate will remain at 0.10%, despite soaring house prices.

However, during the press conference following July’s cash rate announcement RBA Governor Philip Lowe revealed that the RBA is strategising how to reign in the nation’s growing house prices.

Housing markets have continued to strengthen, with prices rising in all major markets. Housing credit growth has picked up, with strong demand from owner-occupiers, including first-home buyers,” he said.

Dr Lowe assured that the RBA was looking for ways to reduce the raging housing market, including limits on loan-to-value ratios and debt to income; and new interest rate buffers where borrowers are assessed against higher repayment levels.

Dr Lowe deviated from the usual rhetoric surrounding the August cash rate, signalling that the strength of the economy and housing market may mean the cash rate is lifted earlier than the 2024 deadline.

Australian suburban houses

“Our central scenario continues to be that the condition for an increase in the cash rate will not be met until 2024,” Dr Lowe said. “But there are alternative plausible scenarios as well … This means that probabilities have shifted”.

Dr Lowe said that the economy has moved into an expansion phase, which could mean the benchmarks for a rate rise may be met before previously predicted.

The economic recovery in Australia is stronger than earlier expected and is forecast to continue. The outlook for investment has improved and household and business balance sheets are generally in good shape,” he said.

However, Dr Lowe stated that the ongoing closure of Australia’s borders was a major unknown factor in the nation’s recovery, with the lack of skilled migrants inhibiting investment plans and putting upward pressure on wages.

Dr Lowe’s main area for concern was the soaring house prices being experienced across the nation, which show no signs of slowing in 2021.

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Forecast for housing prices

According to a forecast from the National Bank of Australia (NAB), capital city property prices will see an average increase of 18.5% in 2021.

Unsurprisingly, Sydney is leading the pack with market growth, experiencing an unprecedented rise of 15.4% in the first half of 2021 and a predicted increase of 21.6% for the year.

NAB forecasts that the market will cool off in 2022, experiencing a meagre 3.6% average increase across the capital cities.


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Factors behind the increase in housing prices

In addition to the record low-interest rates, a number of other factors are fuelling the housing boom.

For first homeowners, in particular, government incentives like the First Home Loan Deposit Scheme and HomeBuilder are having a massive impact on their willingness and ability to buy a home.

NAB surveyed property professionals to determine just how much these schemes were helping first homeowners get into the property market.

From a rating of 1-10 (10 being the most help to first home buyers), the property professionals gave both schemes an average score of 6.6.

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How are lenders reacting to the August cash rate hold?

Major and non-major lenders are forging their own path when it comes to interest rates.

According to data from RateCity.com.au, during the month of June, 17 lenders increased a 2-year fixed rate, and 19 lenders increased a three-year fixed rate.

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What are the Big 4 Banks predicting?

Experts from both Westpac and the Commonwealth Bank are predicting an early rate rise.

Both banks are projecting that the cash rate will hit 1.75% as early as 2023, with the first increase to occur as early as 2022.

Although a rate-rise that size would only add hundreds of dollars to monthly mortgage repayments, experts believe that it would be enough to decrease housing demand and cool down the property market.

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Words by Nell Matzen

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