Australia’s housing market is surging at the fastest rate since 2003 but it’s anyone’s guess how long the run will last.

It’s easy to point to record low interest rates, as the RBA itself noted in the minutes of its most recent monthly meeting, released yesterday.

There has been speculation the RBA might increase interest rates from the housing boom alone but the RBA has said this is unlikely until wages and inflation start to grow again.

“Our judgement is that we are unlikely to see wages growth consistent with the inflation target before 2024,” Governor Phillip Lowe said in an opinion piece published in the AFR earlier this month.

“This is the basis for our assessment that the cash rate is very likely to remain at its current level until at least 2024.”


Australia’s housing market helped by stimulus

However, interest rates are only one factor in Australia’s booming housing market.

In yesterday’s board minutes, the RBA also credited fiscal policy measures that boosted household incomes and incentives for construction such as the Home Builder program.

It warned that the current boom could end when these wind down.

“Approvals were expected to decline from high levels in the period ahead as these stimulus programs were wound down,” it said.

“Once these buildings are completed, there could be a significant decline in construction activity, particularly given very low population growth.


Credit restrictions could hit the market

While as the RBA noted housing prices saw a slight decline early on in the COVID-19 pandemic, the last decline was in 2017.

Pete Wargent, co-founder of buyers agent and Doron Peleg, CEO of RiskWise Property Research, noted this was due to credit restrictions implemented by the Australian Prudential Regulatory Authority (APRA), which supervises the banks and other lenders.

The pair think it’s possible APRA might intervene before the end of 2021 and this could slow down Australia’s housing market.

“APRA’s previous market intervention in 2017 to slow down the pace of investor and interest-only lending showed that targeted measures can be very effective in reshaping the trajectory of the housing market,” Peleg noted.

As an example, Peleg pointed to New Zealand’s move in reinstating loan to value ratio restrictions. New Zealand had only removed them last April during New Zealand’s lockdown but bought them back out among fears the housing market would overheat.

“This is expected to slow down the very fast pace of growth in housing prices as 2021 progresses,” he said.

One critical difference between 2021 and the boom preceding 2017 is that investor loans made up a far lower share of lending. This would mean a different approach would be required this time around.

Peleg also argued the market was only just heating up now and capital city prices were only around 2017 levels.

“So there will be no urgency to bring in credit restrictions,” he said.


Are measures to slow Australia’s housing market needed at all?

Wargent said intervention to slow Australia’s housing market shouldn’t happen – at least not yet.

“We’ve seen several property market frenzies over the years, and they do tend to die of old age eventually, as more sellers look to capitalise on their gains and as buyers become more circumspect as the cycle progresses,” he said. 

“My opinion is that unless there’s been clear evidence of pro-cyclical deterioration in lending standards, macroprudential measures should ideally be set and forget.

“Constant fine-tuning makes it very tough for market participants, including homebuyers and developers, to make important life and business decisions in good faith.”  

Wargent also echoed the Reserve Bank in arguing as strong as house prices were, that didn’t mean the entire economy had completely shrugged off COVID-19 just yet.

“We have record low wages growth and a lot of slack in the labour force, while total credit growth was benign at just 1.7 per cent last month. 

“The last thing we need is more restrictions right now. New measures should only be brought in if it becomes essential to slow the market towards the end of 2021.”