Low rates inflate asset prices: RBA

RBA’s confidential analysis suggests that house values could rise by 30% over 3 years if borrowers believe that the cut in interest rates is permanent.

RBA Governor Phillip Lowe said rates would not increase for 3 years, which certainly looks like a long time into the future for most people. The delineation between permanent and far enough away to create willingness to take on extra investment risk is open to interpretation.

As voiced in previous posts and in The Property Planner, Buyer and Professor podcast, the RBA document confirms our view that financial regulators will be ready to step in if necessary. The RBA stated the biggest risk to the economy is high unemployment, which was 6.8% in November. Lowering unemployment will be the focus of monetary and fiscal policy and stimulus, with higher asset prices simply being a by-product. The RBA’s view is that growing household wealth via increased asset prices and boosting cash flow will increase spending and create more jobs. Managing property values escalating isn’t the top priority of the RBA. With the cash rate cut by 1.4% since 2019 to a record low 0.1% and new home loan commitments at record highs, this will flow through to property values into 2021. However, more jobs is the primary goal for a highly functioning economy.

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