The Reserve Bank of Australia has kept the official cash rate on hold at a record low of 0.1% as the value of homes across the nation soar to new highs.

In its final meeting of the year, the RBA noted the COVID-19 Omicron variant presented a new source of uncertainty but said it’s not expected to derail the recovery.

The official cash rate has remained unchanged throughout 2021. Picture: realestate.com.au

“The Australian economy is recovering from the setback caused by the Delta outbreak. High rates of vaccination and substantial policy support are underpinning this recovery,” RBA governor Philip Lowe said in a statement following the decision.

“The economy is expected to return to its pre-Delta path in the first half of 2022.”

Mr Lowe said the RBA remained committed to keeping interest rates low until it’s confident inflation will remain within its 2-3% target range.

“This is likely to take some time and the Board is prepared to be patient,” Mr Lowe said.

The low interest rate environment has been a key driver of property prices over 2021, with ABS data on Tuesday showing the value of Australia’s 10.7 million residential dwellings surpassed $9.3 trillion during the September quarter.

Michelle Marquardt, head of prices statistics at the ABS said it’s the first time the total value of residential dwellings in Australia exceeeded $9 trillion.

“The value of Australia’s dwelling stock has risen by nearly $1 trillion in the past six months,” Ms Marquardt said.

“By comparison, the previous increase of just over $1 trillion took 15 months, rising from $7.2 trillion in the December quarter 2019 to $8.4 trillion in the March quarter 2021.”

It comes as residential property prices surged 21.7% over the year to September, the strongest annual growth on ABS records.

All capital cities recorded increases with growth rates either setting new records or reaching levels not seen in many years.

“The September quarter results were consistent with housing market conditions,” Ms Marquardt said. “Continued solid growth in residential property prices was supported by record low interest rates, strong demand and low levels of stock on the market.”

Risky loans rise

Surging property prices have caused borrowers to take on larger loans in order to secure a home.

Data released on Tuesday by the banking regulator APRA showed almost a quarter of new mortgages issued during the September quarter were at a debt-to-income ratio considered risky.

It found 23.8% of new home loans issued in the three months to September had a debt-to-income ratio of six times or more, up from 21.9% in the June quarter, and 16.3% a year ago.

Low interest rates have driven property prices higher. Picture: realestate.com.au

In a statement, APRA said the increase had been influenced by the low interest rate environment, increasing house prices and relatively low wage growth.

Mr Lowe acknowledged the impact interest rates have had on the property market.

“Housing prices have risen strongly over the past year, although the rate of increase has eased over recent months,” he said.

“Housing credit increased by 6.7% over the past year, but, more recently, the value of housing loan commitments has declined from high levels.

“With interest rates at historically low levels, it is important that lending standards are maintained and that borrowers have adequate buffers.”

In October, APRA implemented new lending rules to increase the minimum interest rate buffer lenders use when assessing a loan application, to ensure borrowers aren’t overstretching themselves.

The changes came into effect from 1 November.

Mortgage rates on the move

While the official cash rate has been unchanged for over a year, lenders have been making changes to their mortgage rates.

Smartline and Mortgage Choice CEO Susan Mitchell said fixed interest rates in particular had been trending higher.

“There has been a lot of movement in home loan interest rates, particularly increases in fixed interest rates,” Ms Mitchell said.

“We’re seeing borrowers react to these changes in pricing by steering away from locking-in their home loan interest rates.”

Fixed rate mortgages have been trending higher. Picture: realestate.com.au

Mr Ryan said fixed rates have increased for a number of reasons.

“First, expectations for interest rate increases have increased, and second, the RBAs term funding facility that provided cheap funding has wound up,” Mr Ryan said.

“So fixed rates, particularly for longer than 3 years, have been increasing and are likely to continue to do so.”

However, the fiercely competitive lending market has also caused banks to lower their variable rates.

“Competition for variable rate loans continues to be strong, particularly for owner-occupiers, and these rates are continuing to fall,” Mr Ryan said.

Ms Mitchell said the summer holiday break is a good time for borrowers to review their housing needs for the year ahead.

“The good news is that access to historically low interest rates continues, however, affordability constraints remain the biggest barrier to entry for many, especially first time buyers,” she said.

“The New Year is a great time to review your services and subscriptions. For most households, the home loan is by far the biggest expense so I encourage all borrowers to meet with their local mortgage broker to review their home loan and ensure they’re still getting a good deal.”

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