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The current trend in rising home values could push back the RBA’s plans to cut interest rates.
As the nation’s housing price growth continues to pick up steam despite a neutral cash rate setting by the Reserve Bank of Australia (RBA), HSBC Bank chief economist Paul Bloxham has suggested this may delay easing in monetary policy in the near term.
Indeed, the latest CoreLogic Home Value Index (HVI) revealed a 0.6 per cent rise in national home values for February 2024, representing an acceleration from the 0.4 per cent recorded in January.
This was the strongest monthly gain in values since October 2023.
“These housing price rises are still pretty solid and appear to be gaining momentum, all despite the RBA’s above neutral policy rate setting,” Bloxham said.
However, Bloxham posited that a tight housing market with consistently rising prices and rents is not the “typical recipe for rate cuts”.
“First, we expect that the RBA will judge that rising housing prices are a sign that the household sector is still doing ok in the face of the central bank’s tightened policy setting,” Bloxham said.
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“Second, the still tight housing market will also make the RBA concerned that rising rents will continue to be a strong contributor to inflation.
“Finally, the RBA may also not want to deliver rate cuts when housing prices are already rising strongly, given concerns that it would be pump-priming a housing market that is already heating up.”
Bloxham added that expectations for rate cuts may also be fuelling a housing price rise and with the upswing making those cuts less likely.
“Our central case is that rate cuts are unlikely in Australia in 2024,” he said.
“Policymakers ought to have a steely-eyed focus on lifting productivity, as the sooner the supply-side improves, the sooner inflation comes down and the sooner the RBA can consider cutting rates.”
Following the February monetary policy meeting, RBA governor Michele Bullock expressed that interest rate cuts may happen sooner than expected and before inflation hits its target range.
The governor, however, added the caveat that this would only occur should the RBA remain confident that inflation will return to the target range of 2–3 per cent.
Currently, the Reserve Bank’s forecast has inflation returning to 3 per cent in 2025 before reaching the midpoint of 2.5 per cent by 2026.
Bullock reiterated that while recent data may be encouraging, bringing inflation down still poses a major challenge for the Australian economy.
[RELATED: Rate cuts may come sooner than expected: Bullock]
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