An unprecedented run without interest rate rises has fuelled house price rices and record levels of debt. But while the Reserve Bank is signalling the end of rate cuts, that level of debt and ongoing low wages growth means a rate rise might still be some months away.

It has now been 82 months since the Reserve Bank last increased the cash rate. It is fair to say things have changed in the nearly seven years since November 2010. Back then the RBA was raising the cash rate to 4.75%, and now it is just 1.5%. It was a time when the average discount mortgage rate was 7.15%; now it is 4.45%.

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What difference does that make? If you have a $400,000 mortgage, that is the difference between paying $2,702 a month in mortgage payments and paying just $2,015 – over $8,000 less in mortgage payments over the course of the year.

But that extra money is unlikely to increase. In a speech this week in Perth, the governor of the Reserve Bank, Philip Lowe, let everyone know that the days of interest rate cuts are at an end.

Lowe told his audience that while “monetary policy can make for a more predictable investment climate by keeping inflation low and stable” he also noted that “beyond these effects, monetary policy has little influence on the economy’s potential growth rate”. Rather, he suggested “other forces that are likely to be more important in shaping the next chapter of the Australian economy” – other forces being changes in technology, and growth from the USA and Asia.

That is not the statement of a man who wants the market and consumers to think he is about to cut interest rates in order to get growth going.

One major problem for the RBA in cutting rates is while it might create some economic growth, it would almost certainly bolster a housing market that finally appears to be slowing in Sydney and Melbourne.

The latest residential housing price data out this week by the ABS showed the annual growth of house prices in all capital cities except Hobart is slowing:

The figures line up with the slowing of growth of housing finance in the past six months. If the pattern of house prices following housing finance continues, the annual growth of housing prices should begin to fall:

For those in Sydney looking to buy that would be a blessed relief.

The ABS also found that in June the median house price in Sydney was $1.02m. Even using a rolling 12-month average price of $965,400, that comes to a 70% increase since the RBA started cutting rates at the end of 2011 – nearly double that of Melbourne:

In December 2011, the median Sydney house price was 15% higher than in Melbourne – now it is 42% higher. So it really should be some relief for many in Sydney that the RBA is no longer talking about cutting rates. But with that relief comes the fear for those who are homeowners of what will happen if rates rise.

Predictably, the market is taking Lowe’s words to mean a rate rise is on the books. The market is currently pricing in a rate rise by the middle of next year and a second one early in 2019:

Now of course the market is often wrong on these things, but there has been a marked shift in expectations since June, when there was no sign of a rate rise at all, and even since July when investors first started thinking the era of interest rate cuts was over.

But one reason the market might be a bit over-eager in believing a rate rise is on the way is the note of concern Lowe raised about the large levels of debt Australians now hold.

He noted that “over recent times, Australians have borrowed a lot to purchase housing” and that “this has added to the upward pressure on housing prices, especially in our two largest cities”.

While he suggested that “Australians are coping well with the higher level of debt” he also noted that “the very high levels of housing prices in our largest cities are also making it difficult for those on low and middle incomes to buy their own home”.

One of the issues of greater debt is that a rate rise now would have a much greater impact on household income than it did in the past.

The median price of a house in Sydney in December 2011 was $567,000. The average discount mortgage rate at the time was 6.55%. It meant your mortgage payment, if you had paid a 20% deposit, was $2,881 a month. Due to the interest cuts, that would now be $2,284. So yes, you are very much better off.

But what about if you had bought a house in June this year at the median price? Even with a 20% deposit and the low discount mortgage rate of 4.45%, your monthly repayments are $3,891.

Little wonder the latest household expenditure survey by the ABS saw a jump in the proportion of weekly spending going to mortgage payments:

Yes interest rates are lower, but the price of houses – especially in Sydney and Melbourne – is so much greater that unless you bought before the price boom, your mortgage payments are higher now than had you bought back then.

So the Reserve Bank knows that while another rate cut will create more debt, a rate rise will hurt because of the debt levels already in existence.

And while the RBA is optimistic about economic growth both here and overseas, just because the economy is growing solidly doesn’t mean rates necessarily need to increase.

The lack of inflation both in the cost of goods and services and in our wages is a block to increasing rates – why lift rates to curb inflation when there is none?

Since the global financial crisis the cash rate has moved pretty much in line with wages growth:

The latest minutes of the monthly RBA board meeting also noted that the bank continues to hold a “forecast for growth in wages to remain low for some time”. Would the RBA really increase rates while real wages are flat?

If you do have a home loan you should of course be budgeting for a rate rise. In July Lowe suggested a cash rate two percentage points higher than the current rate was the “neutral” position the RBA would like to get back to one day. So you could do worse than budget for a two point increase to your mortgage rate happening at some point.

But while economic growth, non-mining business and employment is improving, if inflation and wages growth remains at record lows and debt is at record highs, the RBA is going to be pretty cautious about raising rates.