RBA reckons house prices will boom, until this target improves.
So the RBA reckons house prices are going to boom 30% over the next three years.
They got hit with a Freedom of Information request. People wanted to know what the RBA would happen with interest rates at such incredible lows, and money gushing into the system.
Surprise, surprise. They think house prices are going to boom.
Confidential analysis by the Reserve Bank of Australia suggests house values could jump 30 per cent over three years if borrowers believe the cut in interest rates is permanent.
… An internal RBA document released on Friday in response to a Freedom of Information request says the biggest risk to the economy was high unemployment, and that stronger household balance sheets from low rates could help counteract the danger.
“High unemployment is the biggest risk to the economy, balance sheets and medium-term financial and macro stability, and lower interest rates can help reduce this risk.”
Unless there is evidence of a sharp jump in credit growth and risky lending – which it does not presently see – the RBA is relatively comfortable with rising house prices.
No kidding. Their economists must be reading my blog. But it’s not rocket science. Super-low interest rates were always going to cause house prices to boom.
The only question now is there anything that might cause the RBA to change course?
Here, the RBA gives us a clue:
“High unemployment is the biggest risk to the economy, balance sheets and medium-term financial and macro stability, and lower interest rates can help reduce this risk.”
With inflation effectively side-lined for now, the RBA’s focus has shifted to employment, and they’re letting us know that low rates are here to stay, until the employment data improves.
And what’s happening on that front?
Well, so far the employment data has been pretty positive. Employment on the whole is holding up, although there has been a shift from full-time to part-time work.
(Part time employment is now higher than it was pre-Covid!)
The headline unemployment rate has also improved, back down to 6.6%. There’s also been a big improvement in underemployment, and the underemployment rate is now lower than it was in March. That does seem a bit unusual, and maybe reflects the influence of the JobSeeker supplement and JobKeeper.
Westpac calculate an “effective unemployment rate”, which tries to look through the impact of Covid. On their measure, effective unemployment is back where it was pre-Covid, suggesting that the labour market is very well placed.
The RBA would be happy with this, but there’s still upward pressure on the unemployment rate, particularly as JobKeeper winds up in March. The pivot to part-time also needs to be reversed at some point.
So you wouldn’t describe the labour market as ‘tight’, even though the headline figures are looking pretty decent.
So I’ll be watching the employment data closely over the next 6 months.
If things hold around their current levels, then I think the RBA will see it as a case of ‘steady as she goes’.
If things get worse, especially as JobKeeper is unwound, then the RBA may even be encouraged to pump more money into the system through their QE program.
And if we see a pivot back to full time work, followed by a drop in the unemployment rate back into the 5’s, then we might see the RBA try to taper things back.
But even in the best case scenario, that’s 9-12 months away.
So watch this space.
For now, the RBA’s boom has legs.
JG