Housing market has firmed following rate cuts: RBA February minutes

Reserve Bank board members noted a number of improvements in the housing market on the back of previous rate cuts when it decided to leave the cash rate on hold at 3% in February, according to the minutes of the February 5 monetary policy meeting released today.

The minutes suggest the RBA has adopted a wait-and-see approach on the impact 175 basis points cut from the cash rate since November 2011 will have on an already firming housing market and other non-mining sectors of the economy.

“While conditions remained soft in the construction industry, there were some signs that the housing market had firmed, partly due to the series of interest rate reductions over 2012," read the minutes.

“Notwithstanding month-to-month volatility, building approvals had increased since the middle of 2012, particularly in states other than Victoria, and prices and rental yields in the established housing market had also picked up."

In the December minutes – when the RBA cut the cash rate by 25 basis points to 3% - the RBA board that consumer sentiment had improved, “consistent with employment growth picking up to a moderate pace and better conditions in the housing market”.

The February 5 minutes note that following the December cash rate announcement, "most Australian lenders had reduced their standard variable housing rates by around 20 basis points.

"This reduction had brought the average interest rate on outstanding housing loans to well below its longer-run average and only a little above its 2009 low. Rates on small and large business loans were also close to their 2009 lows," read the minutes.

At the February meeting, RBA board members were also briefed on the GDP outlook, which is forecast to be a bit below trend at 2.5% over 2013, but also that "improving conditions in the housing market were expected to continue to provide support to dwelling investment, while non-mining business investment was expected to pick up gradually over time".

Apart from the weaker GDP outlook, the RBA board said housing finance remained relatively subdued, and indicators suggested that non-mining business investment would continue to be weak in the near term the negative side.

However, the minutes end with the RBA hinting at a wait-and-see approach noting that "interest rate sensitive parts of the economy had shown some signs of responding to these lower rates, which were well below their longer-run averages, and further effects could be expected over time".

"Noting that monetary policy was already accommodative as a result of the substantial easing of policy over the past 15 months, and that this stimulus was continuing to work its way through the economy, the Board judged that it was prudent to leave the cash rate unchanged at this meeting," concluded the RBA.