RBA Anticipates Asset Prices to Shoot Up Over Lower Interest Rates, Housing Price to Surge 30%

Reserve Bank of Australia (RBA) has disclosed its assessment of the low-interest environment on asset prices and the impact of monetary policy on savers, depositors & self-funded retirees.

Household Spending to Experience a Boost

Confidential analysis by the central bank estimates that its term funding facility, bond purchases, and lower interest rates across the yield curve are likely to support the economy and asset prices by lowering the financing costs for borrowers while keeping the credit supply open for them.

Also, these programs from the central bank along with lower interest rates are estimated to contribute to the lower exchange rate, supporting asset prices and balance sheets.

As per RBA’s assessment, asset prices along with wealth and household spending should take a boost from these programs and lower interest rates. The estimated increase in household spending would be mainly due to an increase in the value of collateral, allowing households and businesses to borrow more, leading to an overall surge in consumption and investment.

Housing Price to Surge 30 per cent

Apart from many assets likely to increase, housing prices are estimated to witness a major boost with house value jumping 30 per cent over three years on a permanent basis whole jumping 10 per cent on a temporary basis.

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Moreover, RBA estimates that the impact of monetary policy has been greater in local areas, leading to housing supply constraints and higher mortgage debt. At present, much of the credit growth is estimated to come from owner-occupiers; however, the activity of first home buyers has also gone up over the past few months as per the loan commitments data.

The increase in first home buying activity further reflects on access to housing for younger households.

Lower Interest Rates May Fan Some Risks

Whilst RBA’s policy is anticipated to support asset prices and the economy, the central bank also assesses that some risk might also prevail in the limelight of lower interest rates.

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The central bank anticipates that an increase in asset prices could induce too much credit borrowing if accompanied by looser lending standards or optimistic assessments of risk.

Furthermore, a surge in asset prices, especially an increase in housing prices could further indicate new property construction, creating an overhang of excess supply, leading to a decline in prices.

However, while some risk may be more prevalent as compared to others, one major risk, i.e., unemployment could be tackled by balance sheets & medium-term financing, macro stability, and lower interest rates.

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