The catch-22 of rising house prices and likelihood of a rate cut

Commentary from HSBC has highlighted the almost cruel twist of fate binding together rising housing prices and the probability of future interest rate cuts by the Reserve Bank of Australia (RBA), after another week of rapid house price growth. 

Paul Bloxham, Chief Economist, Australia, New Zealand & Commodities, said housing demand “appears to be strong relative to supply” after a population surge last year and prices are being kept alive by growing expectations of an impending rate cute; however, this very same driver behind rising house prices could also be the reason behind the RBA choosing to hold or even increase rates in future meetings.

“Last week’s housing price figures also confirmed an upswing, with housing prices rising by 0.6% m-o-m in February, up from an average of 0.3% m-o-m rates in the previous three months,” he said.

“These housing price rises are still pretty solid and appear to be gaining momentum, all despite the RBA’s above neutral policy rate setting.

“With limited new housing supply and strong demand, housing prices have been rising despite the higher interest rates. The higher interest rates have, however, strained some mortgage holders, which has been a factor driving increased listings. This has boosted available established housing supply to some degree, but, as we had expected, this has not been enough to drive overall housing price declines.

“Critically though, a still tight housing market with rising housing prices and rents is not the typical recipe for rate cuts. First, we expect that the RBA will judge that rising housing prices are a sign that the household sector is still doing OK in the face of the central bank’s tightened policy setting. Second, the still tight housing market will also make the RBA concerned that rising rents will continue to be a strong contributor to inflation.

“Finally, the RBA may also not want to deliver rate cuts when housing prices are already rising strongly, given concerns that it would be pump-priming a housing market that is already heating up.”

Bloxham confirmed HSBC’s stance that the RBA is unlikely to bring down interest rates in 2024.

“This week we get the Q4 GDP figures. We expect them to show continued weak growth. Our central case is for growth of 0.3% q-o-q in Q4 – as consumer spending remains weak due to falling real household disposable incomes,” he said.

“However, weak growth is what is needed to get still-too-high inflation to fall further. Weakened demand is helping to take some of the pressure out of a still fully-employed economy, although it seems likely that the economy is still operating beyond its sustainable rate.

“On this, housing is a clear example where undersupply is evident. Policymakers ought to have a steely-eyed focus on lifting productivity, as the sooner the supply-side improves, the sooner inflation comes down and the sooner the RBA can consider cutting rates.”