Insight: Rising Housing Prices Not Worrying RBA

By Sophia Rodrigues

The Reserve Bank of Australia isn’t worried that recent cuts in the cash rate has pushed up housing prices and on the contrary, is relying on its impact on household consumption and dwelling construction to provide boost the economy.

That is not the say the RBA isn’t watching developments in the housing market closely. Indeed the RBA is. However, it is more focused on growth in household credit rather than housing prices, and at this time it is not seeing any worrying signs.

The RBA is also quietly confident that the era of rapid credit growth is unlikely to return anytime soon because households are now more cautious about taking on additional debt.

It is this sanguine view about housing prices and the housing market in general that would push the RBA to lower the cash rate to a new record low of 0.75% at the board meeting on October 1.

A rise in housing prices is important for the economy because of its positive impact on household consumption and for dwelling construction.

Residential construction activity and turnover in the housing market are important sources of income for unincorporated businesses in Australia, and lower activity in these areas is one of the reasons for recent declines in non-labor income.

In the June quarter, dwelling investment fell 9.1% y/y, a bigger fall than the 6.8% forecast by the RBA.

Looking ahead, the RBA’s forecast is for dwelling investment to  fall 9.0% y/y in the December 2019 quarter, -7.0% in June 2020 before improving to a 0.4% rise in June 2021.

If house prices sustain their gains and lead to increase in dwelling construction, it would be an upside risk to the RBA’s growth forecast.

In the August Statement on Monetary Policy, the RBA said if housing prices recover faster than expected, property developers could respond by more than expected.

“This scenario is more likely if the weakness in construction is initially more prolonged than expected because, in an environment of strong population growth, this will lead to an undersupply of housing and more upward pressure on prices.”