ANZ boss warns further rate cut could inflate Australian housing bubble risk

A third senior financial services executive has come out to warn that lower interest rates could inflate a housing bubble in Australia following the RBA cash rate cut on Tuesday.

Phil Chronican, chief executive of ANZ Australia, told Fairfax radio station 3AW that one had to worry “when there is a lot of cheap money around that results in asset price inflation”.

“That’s been true over the past 40 or 50 years.”

“I do think it’s an issue that the authorities have to keep in mind over the next year or two,” he added.

His comments come a day after Barry Brakey, head of property at the The Future Fund, warned property investors of the inflation caused by a lot of capital waiting to be invested directly into the Australian property market.

The Future Fund is an independently managed investment fund established in 2006 into which the Australian government deposits its budget surplus. It holds $4.95 billion in property around the world.

Patrick Winsbury, senior vice-president of Moody’s, has also expressed concerns about the effect lower interest rates may have on Australian property prices.

Winsbury said there was a key side-effect risk that lower rates could inflate a housing bubble.

“It’s one of the scenarios we consider when we analyse the credit-worthiness of the banks,” he said.

The cash rate is now at three-year low and just 25 basis points off record lows of 3%.

House prices rose 1.4% in September, according to RP Data-Rismark – the biggest monthly gain since March 2010, with RP Data’s national research director Tim Lawless saying he expected further capital value gains over the next few months, though not at the magnitude of the September gain.

However, not everyone agrees that lower interest rates might create a housing bubble.

AMP Capital Investors chief economist Shane Olive said yesterday that the cash rate would need to fall to 2.5% to deliver a variable mortgage rate around 6%, which would be low enough to be “stimulatory” and improve consumer and business confidence.

He says the current average variable rate of about 6.75% is only the neutral setting.

Oliver expects banks to pass on about 20 out of the 25 basis points to borrowers.

None of the major banks have made an announcement yet about interest rates.

ANZ will make its independent interest rate announcement in a week’s time (October 12).

For advice on navigating hotspots, download our free eBook: Tools for Getting Through the Hotspot Maze. This article first appeared on Property Observer.