Continuing an eight-month trend, the Reserve Bank of Australia (RBA) has held the cash rate at 1.5 per cent at its April board meeting.
In a statement made today, governor Philip Lowe has referenced increases in mortgage rates and growth in household borrowing outpacing growth in household income as influencing the decision.
The decision to hold the cash rate is understandable when you consider how many leading banks, including the big four, have been steadily increasing principal and interest and interest only rates for owner-occupier and investor home loans.
On Friday, the Australian Prudential Regulation Authority (APRA) advised banks that it expects them to tighten lending practices on interest-only loans. Following this announcement, three of the four major banks raised interest rates in interest-only and investor loans.
“By reinforcing strong lending standards, the recently announced supervisory measures should help address the risks associated with high and rising levels of indebtedness,” Lowe said.
“Lenders need to ensure that the serviceability metrics that they use are appropriate for current conditions.”
“A reduced reliance on interest-only housing loans in the Australian market would also be a positive development.”
New rules implemented by APRA limit interest-only loans with banks to no more than 30 per cent of their total new home lending. APRA chairman, Wayne Byres, advised that this was to ensure banks recognise the “heightened risk in the lending environment, and that their lending standards and practices appropriately respond to these conditions.”
Housing prices in Sydney are also at a seven-year high, increasing another 1.4 per cent across Australia in March. Data from property group, CoreLogic, has shown that annual property price growth has grown 19 per cent in Sydney and 16 per cent in Melbourne.
It is evident that the RBA will want to see how the growth in household borrowing and increasing mortgage interest rates may affect the Australian economy before making any changes to the cash rate.