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OECD flags housing risks, tips rates to rise in 2017

Australia’s 25-year recession-free stretch could come to an end if low rates continue to accelerate house prices and subsequently weaken demand and construction activity, according to the OECD.

In an economic forecast published this week, the Organisation for Economic Co-operation and Development says the cash rate should begin rising from next year to offset risks that have been building in the housing market.

“Monetary policy tightening is expected to commence towards the end of 2017 and this is appropriate given likely monetary-policy developments elsewhere, the cyclical development of the domestic economy and the need to unwind tensions from the low-interest environment, notably in the housing market, which has in many places experienced rising prices for some time,” the OECD said.

“The government envisages fiscal consolidation. In the event of disappointing growth, however, fiscal rather than monetary support should play the leading role given the housing-market concerns and fiscal leeway. Tax reform should be a core element of structural policy,” it said.

The RBA’s last rate cut of 25 basis points back in August could be the last reduction Australians see for a while, according to the OECD, which projects the cash rate to remain at 1.50 per cent for most of next year.

“No further easing is projected, and rate increases are projected to begin towards the end of 2017 as spare capacity fades,” it said.

“Despite the employment of macro-prudential measures to cool the housing market, the net gain from monetary easing has narrowed. Significant housing market concerns remain and there is growing discord between financial market developments and rest of the economy due to the low-interest rate environment.”

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A number of economists believe further lending curbs could be on the cards after repeated warnings from the RBA and APRA about risks in the housing market.

Speaking at the Connective Level Up conference in the Hunter Valley earlier this month, CBA economist Savanth Sebastian said the last couple of speeches given by new RBA governor Philip Lowe have made clear that the central bank is not keen on cutting the cash rate any further.

Mr Lowe’s most recent speech warned it is unlikely to be in the public interest… to encourage a noticeable rise in household indebtedness”.

CBA’s Mr Sebastian said housing has been off the Reserve Bank’s “wall of worry” for a while, but recent speeches and the latest RBA board meeting show it is now firmly back on the table. He added that the Reserve Bank is a good lead indicator when it comes to regulatory measures.

“In the last board meeting they started discussing housing once again. They started bringing up concerns around the potential issues of oversupply and that lift in investor loans,” Mr Sebastian said.

“So housing is back in the discussion. Wait and see, but I certainly think the regulators will have a look very closely once again at that end of the spectrum.”

The OECD noted that Australia has experienced 25 years without recession, but “there are risks looking forward”.

“Commodity market developments, particularly those linked to the Chinese economy, remain an important source of uncertainty and risk,” it said.

“Domestically, non-resource investment may remain lacklustre, damping growth prospects. Also, the housing market remains a risk, as an acceleration in price adjustment would weaken consumption demand and construction activity.”

[Related: APRA urged to 'intensify' investor lending crackdown]

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