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RBA Leaves Interest Rates on Hold

No doubt, one of the key topics of conversation at this month’s RBA board meeting was around housing market conditions and the ongoing rebound in the rate of capital gains over the second half of 2016 and first two months of 2017.

The CoreLogic monthly hedonic index shows capital city dwelling values have increased by 7.8% since the May ‘16 rate cut. The renewed exuberance in the housing market over the past eight months is due to more than just low mortgage rates. The reacceleration in capital gains also coincides with a substantial rebound in investment purchasing activity which has been a key driver of market demand and upwards price pressures.

The predicament for the RBA is clear, they are unwilling to drop rates because this would likely add further fuel to the housing market; they don’t want to push rates higher as this will stifle consumption and investment more broadly as well as potentially place some upwards pressure on the Australian dollar.

While interest rates remain at their current low level, and in the absence of additional macro prudential measures, we should expect housing demand from investors and owner occupiers to remain strong, particularly in those cities where economic conditions remain strong and migration rates remain high.

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