New Westpac chief economist, Luci Ellis (former RBA assistant governor), believes that the unexpected rebound in house prices poses a key upside risk to inflation that could force the RBA to lift interest rates higher.
“Housing prices are back close to the peaks we saw pre-pandemic. That’s not what you would have expected given the rise in interest rates and weak income growth”, Ellis writes.
“Population growth is a large part of the story and it’s telling that the countries which have seen the biggest surges in population are also the ones where housing prices have picked up most noticeably”.
“This matters because positive wealth effects can boost household spending and add some upside risk to domestic demand and so inflation. The RBA has called this out in their minutes”.
“We allow for these effects in our forecasts, but the more this goes on, the more forecasts will have to be scaled up – and the more likely it becomes enough to tip the RBA Board’s hand”.
I am surprised Luci Ellis did not also mention the surge in rents, which makes up around 6% of the CPI basket and is pushing inflation higher:
The fact of the matter is that the Albanese government’s unprecedented net overseas migration is adding massive demand across the economy and working against the RBA’s efforts to kerb demand and inflation through interest rate hikes.
The impact is most visible in the housing market and may force the RBA to keep rates higher for longer.
These higher rates will exacerbate mortgage stress while also counteracting a housing supply response, which will contribute to further rental inflation.
The first best solution is to limit immigration flows to a level that is lower than the country’s ability to provide housing and infrastructure, as well as in line with the nation’s environmental carrying capacity (including water resources).
The Albanese government must stop fueling inflation and harming the working class by running such extreme levels of immigration.
