Prices may force RBA to lift rates

THE Reserve Bank could be provoked into delivering an earlier-than-expected rate hike if existing regulatory clamps on Australia’s “remarkably resilient” housing market fail to rein in price growth.

And elevated building approval levels suggests regulators may have to consider further short-term curbs as questions swirl around whether new home starts have peaked, according to UBS economists.

UBS economist George Tharenou says the most likely scenario is that lending conditions will tighten and growth in house prices slow as the effects of regulatory moves filter through the banking system.

But if they didn’t succeed, a blunter tool could be necessary, he said, in a note for investors.

“A persistent upside surprise on housing ahead would raise the risk of an ‘early’ RBA cash rate hike before our expected second-half of 2018 start to (policy) normalisation,” Mr Tharenou said.

While it would be wary of lifting rates before seeing consistent evidence of improvement in wages, inflation and the jobs market, the RBA has called out the red-hot property as a major risk to financial sta- bility. Members of the central bank’s board have their monthly meeting today to consider the 1.5 per cent cash rate, which is all but certain to remain on hold.

The banking regulator, the Australian Prudential Regulation Authority, in March ordered lenders to restrict interest-only lending to 30 per cent of all new loans — a cap under which they are only now starting to settle, according to UBS. They responded by ratcheting up prices on those lending products while in some cases reducing principal-andinterest rates.

Official figures show the category — favoured by property investors — has regularly breached 30 per cent all the way back to early 2013.

Mr Tharenou said there would be pressure on lenders to reduce interest-only lending relative to their broader mort- gage lending even further.

They would also face heat to reduce their high loan-tovaluation mortgages — those in which a loan covers more than 80 per cent of the property’s value — given these have also drawn APRA’s ire.

“Policy only works with a lag ... if housing doesn’t slow, further policy tightening may come onto the radar, albeit not until next year,” Mr Tharenou said.