Australian home values continue to power on, with CoreLogic’s daily dwelling values index rising by 0.5% over the past 28 days at the 5-city aggregate level:
The managing director at SQM Research, Louis Christopher, has warned that “with prices rising so strongly, along with strong migration figures and a falling supply of new homes, the RBA would run the risk of creating an overheated housing market were it to cut rates too soon.”.
“The market is still moving ahead. That’s predominantly driven by very strong population growth.”.
“We’re going to most likely have rates at current levels for a lot longer than what many people have anticipated,” Christopher added, noting that geopolitical risk is rising, which could see “a second wave of inflation come through,” which “would stop the RBA in its tracks in terms of cutting rates.”
“There’s a lot of angst out there about rents and housing prices already. To do that [cut rates], that would be potentially quite dangerous for the market and the economy overall.”
“I wouldn’t want to be a central banker right now. I think they’ve got a very difficult job on their hands,” Christopher said.
Louis Christopher makes a strong argument.
With home values already rising on the back of unprecedented net overseas migration, the RBA risks inflaming the market further by cutting rates and boosting borrowing capacity.
It would be like pouring petrol on a bonfire.
That said, the key indicators to watch regarding rates are not house prices but inflation and the labour market.
While inflation has fallen a little faster than the RBA projected, there are still concerns around sticky service inflation, so we will have to see how it plays out.
The official unemployment rate recently shocked economists by falling to 3.7% in February. However, this result flew in the face of a swathe of other data showing deterioration in the labour market.
Chief among these is the circa 60% rise in the number of applicants per job ad, which historically would be associated with much higher unemployment.
I expect Australia’s unemployment rate to catch up with economic reality in the coming months.
In turn, I still expect the RBA to cut rates in the second half, although it is looking more likely in Q4 than Q3.
Regardless, when the RBA does start cutting, it will light a match under the housing market.
The federal government should help the RBA by cutting immigration hard to reduce demand in the economy and to ease out-of-control rental inflation.
