Rate hold aims to support growth and inflation
At its second last meeting of 2014 the Reserve Bank of Australia (RBA) kept the official cash rate steady at 2.5 per cent for the fourteenth straight month and third consecutive Melbourne Cup day.
While the decision to hold rates was widely predicted, Loan Market Chairman, Sam White concedes it's risky to keep interest rates this low when the property market is still so strong, however he cautions against fears of a real estate bubble.
"Prices are a combination of supply and demand. Rather than just attacking the demand side we should be looking at policies which increase supply." Mr White said.
Mr White believes addressing demand issues with macro prudential measures, like increasing the cost of capital for some segments of the home buyer market, would be preferable to the blunt instrument of increasing rates for all Australians. He suggested these changes could be effective, as long as any tools brought in could be measured in an incremental way that allows the RBA to assess the impact of policy changes and then to adjust these policies based on the impact.
"The major concern we'd have by the introduction of macro prudential measures, is that they could be brought in too heavy, and that may have unintended consequences to a sector of the economy which is growing and providing job growth," he said.
White suggests that restrictions on high risk and property investor lending, as well as an increase in affordable housing supply, are both possible ways for slowing down Australia's rampant real estate market.
"In a country where two thirds of the population own their own home, it's important we don't deter people from being able to afford or even find a suitable home.
The recent dip in building approval rates is disappointing for demand. However, the very fierce interest rate competition between lenders continues. And now, more than ever, is a good time for those new to the market to negotiate the right deal on a home loan, or for owners to review their options with their broker," he concludes.
The RBA board meets for the final time this year on 2nd December.