Reserve Bank governor rules out rate hike to cool property market

Megan Neil

14 Sep 2021

Reserve Bank of Australia governor Philip Lowe has ruled out hiking interest rates to cool the nation’s booming property market, while admitting many young people may blame the central bank for higher housing prices.

Mr Lowe again ruled out raising the official cash rate before 2024, saying he found it difficult to understand why financial markets were pricing in rate rises next year or early 2023.

In a speech on Tuesday, Mr Lowe rejected suggestions by some analysts that the RBA may lift the cash rate to cool the property market.

“I want to be clear that this is not on our agenda,” Mr Lowe said.

“While it is true that higher interest rates would, all else equal, see lower housing prices, they would also mean fewer jobs and lower wages growth. This is a poor trade-off in the current circumstances.”

When will interest rates rise?

Mr Lowe acknowledged record-low interest rates had pushed up housing prices, but said the structural factors at play were outside the RBA’s domain.

“I know many young people are very concerned about the level of housing prices and they blame the central bank for the high level of housing prices,” Mr Lowe said during an annual address to the Anika Foundation.

Mr Lowe said concerns about the level of housing prices were not best addressed through increasing interest rates or applying curbs on lending.

“While monetary policy is contributing to higher housing prices at the moment, the way to address these society-wide concerns about affordability is through the structural factors that influence the value of the land upon which our dwellings are built,” he said.

“The factors include: the design of our taxation and social security systems; the planning system; zoning restrictions; the type of dwellings that we build; and the nature of our transportation networks.”

Hawthorn East home

Mr Lowe said those areas were outside the domain of monetary policy and the central bank.

“If our society wants to address housing prices I think we really need to tackle those structural factors,” he said.

“Ever-rising housing prices relative to our income I don’t think serves our collective good very well.

“It’s something that as a citizen I would like to see addressed. As a central bank we can’t do anything about it.”

Mr Lowe noted housing prices were 19% higher than they were before the coronavirus pandemic.

While the RBA and the Australian Prudential Regulation Authority do not target housing prices, Mr Lowe said the Council of Financial Regulators was discussing possible regulatory steps if lending standards deteriorate or credit growth accelerates too much.

Paul Ryan, economist at realestate.com.au, noted Mr Lowe had pushed back on calls for macroprudential intervention to limit housing prices.

“Macroprudential measures, while useful in limiting unsustainable trends in borrowing, will not affect the overall level of prices, and may inhibit access to the market for buyers such as first-home owners,” Mr Ryan said.

“He noted genuine policy concerns about housing prices are best addressed with structural reform to encourage more dwellings to be built and tweaks to tax and social security policy.”

Rose Bay home

Mr Lowe again said the RBA board will not increase the cash rate from its record low of 0.1% until actual inflation is sustainably within its 2-3% target range.

“Our judgement is that this condition for a lift in the cash rate will not be met before 2024,” he repeated.

Mr Lowe said the RBA believed it would take some time for wage increases to lift to a rate that was consistent with achieving the inflation target.

But he noted the RBA’s judgement stood in contrast with the expected path of the cash rate implied by financial market pricing, which implied a cash rate of about 25 basis points at the end of 2022, 60 basis points at the end of 2023 and close to 100 basis points at the end of 2024.

“These expectations are difficult to reconcile with the picture I just painted and I find it difficult to understand why rate rises are being priced in next year or in early 2023,” he said.

“While policy rates might be increased in other countries over this timeframe, the wage and inflation experience in Australia is quite different to these other countries so what’s happening elsewhere in the world doesn’t need to apply directly here.”

Mr Ryan said the RBA governor had delivered a blunt message about the path of the cash rate by specifically contrasting the RBA board’s expectations with financial market expectations.

“Mr Lowe sent his bluntest message yet that the RBA doesn’t expect the cash rate to increase until 2024 at the earliest,” Mr Ryan said.

“The role of actual inflation in the decision to raise the cash rate was reiterated; the RBA will wait until actual inflation is comfortably in the target band of 2-3%, which they expect to take some time given how weak wages growth currently is.”

The RBA expects the latest coronavirus outbreaks of the Delta variant to delay but not derail Australia’s economic recovery.

Mr Lowe said the economic contraction in the September quarter was likely to be at least 2%, and possibly significantly larger than that.

“This is a major setback, but it is likely to be only temporary. We expect the economy to be growing again in the December quarter, with the recovery continuing into 2022.”

Australian property now worth more than $8.9 trillion

The total value of Australia’s 10.7 million residential dwellings rose by $596.4 billion to a record $8,924.6 billion in the June quarter, which the Australian Bureau of Statistics said was the largest quarterly rise on record.

The ABS data released on Tuesday put the mean price of residential dwellings in Australia at $835,700, a rise of $52,600.

Killara mansion Sydney

Residential property prices rose 6.7% in the June quarter, the strongest quarterly growth since the ABS started the data series in the September quarter 2003. Its property price index rose 16.8% over the 12 months to the June quarter.

ABS head of prices statistics Michelle Marquardt said the continued growth in property prices was occurring at a time of record-low interest rates.

“Persistently low levels of stock on the market were being met with strong demand and properties transacting at an increasingly rapid rate,” Ms Marquardt said.

“With the exception of Hobart and Darwin, capital cities continued to see house price rises outpace those of attached dwellings such as apartments and units, with price growth for both property types being driven by the upper segments of the market.”

NSW continued to have the highest mean price of residential dwellings at $1,093,100. The ACT was now the second highest on $891,700, marginally ahead of Victoria’s $891,500.

The latest COVID lockdowns are expected to temporarily slow the strong momentum in parts of Australia’s booming housing market, although national dwelling prices are still tipped to surge by about 20% in 2021 amid massive buyer demand.

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