That paper found low interest rates plus the RBA’s quantitative easing program were lowering borrowing costs, “contributing to a lower exchange rate” and supporting assets including the prices of houses.
It noted that higher asset prices should push up the wealth of people and translate into increased spending, especially for “credit-constrained households”.
“Housing prices are likely to (increase) alongside other asset prices,” it found.
CoreLogic data shows that despite the deepest recession since the 1930s, Sydney’s house prices lifted through 2020 by 4 per cent to edge above $1 million. Melbourne’s median house price fell by a moderate 2 per cent to just under $800,000.
The paper cites previous research by RBA economists that show a permanent percentage point reduction in official interest rates can drive up real house prices by 30 per cent over a three-year period. A “temporary” percentage point reduction in interest rates would push up real prices by 10 per cent.
The bank has cut official interest rates by 1.15 percentage points since June.
But the paper also noted there were risks from low interest rates, including the encouragement of borrowers to “take on too much credit”, looser lending standards, “optimistic assessment of risk” and people taking on mortgages with small deposits relative to the size of their loan.
It said loan-to-valuation ratios were increasing but were still well below the levels evident in 2015 that prompted APRA to tighten lending standards.
If prices continue to rise, more people will end up buying at the top of the price cycle. When that cycle corrected, more of the national mortgage book was “likely to be in negative equity”.
The paper said ultimately the Council of Financial Regulators (CFR), made up of the RBA, APRA, the federal Treasury and the Australian Securities and Investments Commission, would intercede if required.
“Australia’s financial regulators will monitor and control risks,” the paper noted.
“CFR will act if needed.”
The same research paper looked at how low interests were affecting the broader community. It found that higher income and older households were most likely to be detrimentally affected by the drop in interest rates over the past five years.
Five per cent of households headed by a person at least 65 years of age earned more than 20 per cent of their income from interest. If interest earned through superannuation accounts was included, this jumped to a fifth of all households headed by a person of retirement age.
Interest income accounts for 7 per cent of gross regular income for those aged over 65. For those aged between 75 and 79, this increases to 10 per cent.
“Households reliant on interest income are now required to draw down more of their savings than
in the past to maintain the same cash flows,” the paper noted.
One of the “upsides” noted by the paper for savers is that stronger economic conditions and higher asset prices, particularly for their homes, was boosting their overall wealth.
Another winner from low interest rates was the federal government which is expecting to borrow another $77 billion this financial year. Federal debt is already at a record $808 billion.
“Low rates are also supporting government borrowing and subsequently the economic recovery,” the paper found.
Shane is a senior economics correspondent for The Age and The Sydney Morning Herald.