RBA Set to Extend Rate Pause as Housing Crisis Props Up Prices
(Bloomberg) -- Australia’s record household debt was a key factor in the Reserve Bank’s cautious approach to tightening, and now housing is an important consideration in the RBA becoming an outlier in the easing cycle and keeping interest rates on hold this week.
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Housing costs, including rents, constitute roughly a fifth of Australia’s consumer basket and are the biggest driver of inflation after services. That helps explain Governor Michele Bullock’s hawkish rhetoric and why economists see the RBA holding the cash rate at a 12-year high of 4.35% on Tuesday — and keeping it there until at least February.
As the Federal Reserve kicked off its easing campaign last week, the RBA’s message had been clear: it’s “premature” to consider rate cuts. Underlying inflation in Australia is running at 3.9% — well above the 2-3% target — and the RBA expects it will only return to the band in late 2025.
“The Australian circumstance is perhaps no coincidence given that the RBA has been less aggressive than the Fed in raising the policy rate to tackle inflation,” said Stephen Miller, an investment strategist at GSFM. “The flip side is that it might need to exercise a little more patience when it comes to cutting.”
Many economists, including Westpac Banking Corp. and Goldman Sachs Group Inc., expect the RBA will undertake a shallow easing cycle when it finally starts cutting, reflecting its cash rate peaking 1 percentage point below the Fed’s.
From the outset, the RBA has been concerned about how much tightening Australians could absorb given they are among the most indebted in the developed world. But it’s the supply side that has turned out to be the main problem as a surge in post-pandemic immigration and soaring residential construction costs triggered a housing squeeze. That sent rents soaring, adding to inflation, and kept property prices rising in a period of restrictive policy.
Mortgage lending, excluding-refinancing, rose 3.9% in July from a month earlier, while home loans to investors jumped 5.4% to be up 35.4% from a year earlier, according to government data. The level of investor lending, at A$11.7 billion ($7.97 billion), is close to a January 2022 peak.
The strong demand for housing has come as build times for new projects have blown out since the pandemic by around 20% from approval to completion, while costs have risen by around 40%, according to Masters Builders CEO Denita Wawn.