OECD tips rate hike and housing correction

The Organisation for Economic Co-operation and Development expects the Reserve Bank of Australia to increase its cash rate in 2018 and believes that “prolonged period of low interest rates” has inflated house prices.

“Monetary policy remains supportive; the policy rate has been kept at 1.5 per cent since August 2016,” the report said.

“Policy tightening is projected to begin in the second half of 2018 when the pick-up in wages and prices becomes more entrenched.”

The OECD also noted that a rate hike will further spur a correction in Australian house prices, which the organisation believes has already begun following regulatory changes.

“The prolonged period of low interest rates has fuelled high house prices in large metropolitan areas.

“Housing markets in certain areas already show signs of easing.

“In recent years, regulators have taken steps to limit the growth of investor lending and have discouraged loans with high loan-to-valuation ratios to improve the resilience of borrowers and lenders.”

In addition, the OECD stated that that tightened regulations must be maintained to alleviate risks associated with high household debt.

“Substantial mortgage borrowing has resulted in households being highly indebted.

“A tighter policy stance will ease pressures on house prices and will reduce the threat of the build-up of other financial distortions.”

The OECD also called for more competition in the banking sector, claiming that high concentration in the market could lead to “too big to fail” risks.

[Related: RBA rate hike could cause ‘house price falls’: UBS]