Business confidence held close to the highest level in two years last month and the value of home loans surged in October to a record, adding to signs that half-century low official interest rates are gaining traction. Investors are leading the charge for new loans, with the Australian Bureau of Statistics reporting an 8.2 per cent gain in approvals. The value of new home loans surged 4.8 per cent after rising 6.5 per cent in September, the strongest two-month gain since mid-2007. At the same time, National Australia Bank’s sentiment survey shows confidence dipped 1 point to 5 from October but a separate gauge of 50- called business conditions improved to minus 3 points from minus 4, led by sectors exposed to record-low official interest rates.

UBS economist Scott Haslem said business conditions had turned after dropping to a four-year low in the middle of this year. ” ‘The lagged impact of record low rates, a lower Australian dollar, and a clearly stronger housing market should see further improvement ahead, consistent with the Reserve Bank staying on hold,” he said.

NAB chief economist Alan Oster said the bank’s survey showed trading conditions were up, especially for mining and manufacturing companies but this was being offset by a further deterioration in employment, suggesting further cuts were to come. Mr Oster said the economy was expected to remain weak, expanding 2.7 per cent next year; not enough to be ‘Jobs friendly”. NAB continues to forecast another Reserve Bank of Australia interest rate cut in May.

Other economists argue there is no need for further interest rate cuts, given signs of strength in the property market In trend terms, investor borrowing is 21 per cent higher than the previous peak in 2007, according to analysts at ANZ Bank. The surge is “reflecting increasing recognition of the upside potential] for home values with an unprecedented and increasing shortage of physical housing stock and historically low interest rates”, ANZ’s David Cannington said. He argues that in combination with rising house prices, the property market is likely to see a surge in construction work in 2014.

The Reserve Bank kept official interest rates on hold this month after delivering more than 2 percentage points of cuts over the past two years. Citigroup economist Paul Brennan said the latest data pointed to a growing dilemma for the Reserve Bank. On the one hand, lending to investors “is on fire”, mortgage sizes are rising after a long period of stability, while business conditions are still underperforming. ‘The RBA needs to hope that pent-up demand for established homes, which is pushing up house prices, particularly in Sydney, will run its course over the next few months,” Mr Brennan said.