Higher house prices are a headache for the RBA. But that won’t stop them lifting.
So the RBA gave us a surprise rate hike last week. If you’re like most economists, you’re probably left wondering, “Where the hell did that come from?”
Because it did sort of come out of nowhere.
After the RBA left rates on hold, the expectation was that they would give the economy a little bit of a breather to see how things panned out.
But nope. They wacked us with another one.
On the face of it, it’s hard to see where it came from.
There was very little that the RBA knew in May that it didn’t know in April. The only exception to that was the inflation data, which actually came in softer than expected.
So for a ‘data-driven’ bank, there was nothing to justify another rate hike.
The Guv’na justified the hike by saying that the RBA had seen:
1) ‘further evidence’ that Australia’s labour market is ‘still very tight’, but that was hardly news.
2) services inflation is ‘uncomfortably persistent abroad’, (So what? No we’re worried about what’s happening to inflation in other countries, despite what’s happening with our own?)
and 3) asset prices including the exchange rate and house prices are ‘responding to changes in the interest rate outlook’.
That last one’s a funny one. Right now, bond markets are pricing in a full two rate CUTS by the end of the year.
At the very least everyone seemed to expect that rate hikes were done.
That was giving home-buyers confidence, and the expectation of rate cuts in the future might be briging more buyers into the market.
That expectation in turn saw house prices bottom out in March, and in some cities like Sydney, house prices seem to be growing very quickly.
Now, on the face of it, the RBA doesn’t care about house prices. But there is something called the ‘wealth effect’ – as house prices lift, households feel wealthier, and start spending more.
And for the body charged with cooling the economy and bringing inflation down, this is a problem.
And so the RBA probably decided that a surprise rate hike was just the shot across the bows that the market needed.
The message here is, “Hey, rate cuts might not be coming. We might even have more rate hikes for ya. Like this one. Bam!”
It was a warning shot.
And I think people heard the message. Maybe.
And I’ve been saying this for a little while too. We can’t bank on rate cuts just yet. If you’re doing your numbers based on interest rates being 50 basis points lower by year’s end, you’re taking a gamble that I wouldn’t be taking.
But still, house prices have clearly turned. They’ll continue rising for the rest of the year.
So are you really going to sit back and wait.
If you’re buying the cycle, the time to buy is now.
Just don’t build a budget that only works if we get rate cuts.
There’s no guarantee just yet.
JG.