Housing, mortgage market and consumer confidence all responding to rate cuts: RBA's Philip Lowe

The reduction in the cash rate has had the expected effect of pushing up asset prices and improving confidence in the housing market, assistant RBA governor Philip Lowe said in a speech today.

Lowe also said the overall rise in the household savings rate from “zero to around 10%” since the mid-2000s was a key factor in keeping the domestic economy in balance in light of the mining investment boom.

“In general, the initial responses to a loosening of monetary policy would be expected to include stronger asset prices, improved conditions in the housing market, a lift in consumer confidence and a lower exchange rate,” Lowe said in an address to the Australian Industry Group 13th Annual Economics Forum.

“Much of this does appear to be occurring.

“Nationwide measures of house prices have increased by around 4% since mid last year, after having declined for around 18 months.

“Home lending approvals and auction clearance rates have both risen.

“Equity prices are up over 20% since the middle of last year. And the level of consumer confidence is now well above its long-run average level.

“Despite what one often hears, households do appear to be feeling better about both their finances as well as Australia's medium-term prospects,” Lowe said.

These remarks follow a speech by assistant RBA governor Christopher Kent last week, where he noted that low interest rates have been supporting the established housing market, and prices have been moving higher in many residential markets across Australia, though they remain below earlier peaks in most markets.

Lowe said the decision by Australian households to increase their savings was the “second broad factor” (the other being the flexible exchange rate) that has “helped maintain domestic balance during the once-in-a-century investment boom”.

Since the mid-2000s, the household sector net saving ratio has risen from around zero to around 10%.

“In today's money this represents about an additional $90 billion that is saved, not spent, by households each year.

“Now I know that this increase in household savings has not been universally welcomed by the retail sector.

“It has caused difficulties for some businesses, including those that based their business models on a continuation of the earlier trends.

“But consider how the economy might have looked over the past few years had households spent an extra $90 billion each year.

“It is likely that there would have been significant overheating. The exchange rate would have been higher. There would have been more borrowing from the rest of the world. And both inflation and interest rates would have been higher. I suggest that these are not developments that would have been warmly welcomed by most in the community,” he said.