Reserve bank leaves cash rate on hold as building approvals fall off a cliff

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THE Reserve Bank has kept the official cash rate on hold at 2 per cent amid growing concern about a slowdown in the Australian housing market.

The central bank last moved in May 2015, when it cut the official cash rate by 25 basis points to its historic low, and was widely expected to hold in its second meeting of the year.

RBA Governor Glenn Stevens said available information suggests that the expansion in the non-mining parts of the economy strengthened during 2015 despite the contraction in spending in mining investment.

This was reflected in improved labour market conditions. The pace of lending to businesses also picked up, he said in his statement.

Mr Stevens said continued low inflation would provide scope for further easing.

Although below trend, economic growth is still holding, with enough positives to outweigh the negatives, BIS Shrapnel head economist Richard Robinson told Finder.com.aus monthly survey.

Confidence rebounded in February, so consumers are not panicking, and households will continue to spend, albeit with modest growth.

But it comes as new data shows approvals for the construction of new homes fell 7.5 per cent in January, which was worse than market expectations of a three per cent fall.

AMP Capital chief economist Shane Oliver said it appeared to have been caused by exhaustion.

Normally building approvals roll over when interest rates start rising, Dr Oliver told news.com.au.

[While] there were some minor increases last year, really the reason is approvals reached record highs and developers realised it would cause indigestion in the market.

With mining investment still with another year or two to fall off, and the coming slowdown in the housing market, the overall drag on the economy would likely push the RBA to cut rates further by midyear, Dr Oliver predicts.

But while the Australian market is probably around 30 per cent overvalued, talk of a looming housing crash is overblown, he argues.

Using words like bubble and Ponzi, that sort of headline-grabbing stuff does that well, but its nothing new. House prices have been overvalued now relative to income and rents for the last 10 to 15 years.

A crash would require a trigger, such as a strong spike in interest rates or unemployment, enough to cause mass defaults and forced selling, according to Matthew Tiller, head of research at LJ Hooker.

In the short term it doesnt look like that kind of event will occur, he said.

Last month, three lenders Yellow Brick Road, Bankwest and Australian Unity quietly hiked their variable rates while the cash rate paused.

Some lenders have a tendency to keep their rate hikes quiet, said Bessie Hassan, spokeswoman for comparison website Finder.com.au.

With the uncertainty in the market, its really important that homeowners dont become complacent about their mortgages and therefore miss any important news that may impact their finances.

Australians should be cautious experts are divided about what lenders will do next. While we dont expect a dramatic upswing in rates, they can turn very quickly and catch borrowers by surprise.