Three point zero five.
There it is the Reserve Bank deciding to slash interest rates by a quarter of a percent. This is the second cut in this current cutting cycle.
When interest rates fall, house prices typically rise.
Historically, when interest rates fall, house prices go up. There's no compelling case as to why this time should be any different, And as someone looking for a house at the moment, I'm quite depressed at that thought.
Some economists expect a modesterize this time around. Others predict it could be up to fifteen percent. But whatever the increase, Reserve Bank Governor Michelle Bullock is not interested.
There's nothing the Reserve Bank can do about these affordability issues of housing.
The RBA cares about inflation, and it cares about the jobs market, and whatever happens to house prices as a result of its actions is not its problem.
Welcome to the Finn. I'm Lisa Murray. Today Economics correspondent Michael Reid on why the Reserve Bank is cutting interest rates and what that means for people like him trying to buy a house. It's Thursday, May twenty nine. Hi, Mike, thanks for coming on the podcast.
Good to be here.
As always, Lisa So, Mike, as a house hunter and the Financial Reviews economics writer, you're watching interest rates very closely. What did you learn from the Reserve Bank Governor Michelle Bullock last week? Why did the Central Bank cut interest rates?
That's right, Lisa. I started my house hunting journey about nine months ago. Now I've seen in that time the RBA switch from inflation fighting mode into interest rate easing mode. Michelle Bullock cut rates in February, which was the first rate cut since November twenty twenty, and she then cut rates again last week for the second time.
Today, the board decided to cut the cash rate by twenty five basis points.
And that taking the cash rate to three point eighty five percent.
Now we've done this because the most recent quarterly CPI confirmed that both headlined and underlying inflation are now under three percent.
That rate cut itself wasn't a huge surprise. We were all expecting it. But what was a surprise was that Bullet revealed that the RBA board had considered an even bigger cut of fifty basis points at the meeting.
The discussion then was about cut and how big, and there was.
A discs which is generally the only thing you'd do if it's an emergency or if you actually think you're a little bit behind the curve. And it was also surprising. In Governor Michelle Bullock's press conference, some of her language signaled that she was much more open to future rate cuts than perhaps we previously realized.
Doesn't rule out that we might need to take action in the future, but for now, we felt that was the right number. One.
The RBA board's posted statement said it viewed the risks around inflation to have become more balanced, so it was feeling a little bit more relaxed. Bullock signaled that should be pretty happy cutting the cash rate again if inflation basically just stayed where it was, which is what the RBA itself is forecasting. You know, remember it did get as high as seven point eight percent back in December
twenty twenty two. I don't think the RBA was seriously on the verge of doing the jumbo zero point five percentage point rate cut option.
The board was of the view that twenty five was the right number on this occasion. With inflation in the band and also an employment doing pretty well, we think there is a bit of scope to lower.
Interest rates in Bullock's own words, the case for the twenty five basis point cut was much stronger than the fifty basis point one, but the fact the board considered the jumbo rate cut is interesting. Nonetheless, and financial markets have bolstered their bets for or future rate cuts as
a result. They say there's a three to four chance that Bullet could cut the cash rate again when the RBA next meets in early July, and they think that by December the cash rate would be down to about three point one percent, So that would be another three rate cuts from here, which would take mortgage rates to around or a little bit above five percent by December.
Before we talk about what that means for the economy and for house prices, it's worth noting that the Reserve Bank brought inflation under control without the unemployment rate going up. And that's a good thing, and it's quite unusual. How has it happened?
Yeah, Lisa, I don't think anyone would have thought when the inflation outbreak started back in late twenty twenty one that would be able to get back to normal without seeing a large increase in joblessness. It's made all the more impressive when you consider the fact that the recent tightening cycle was one of the fastest ones we've had
in several decades to get inflation under control. In the past, generally interest rates have gone up and there's been a sharp slow down in the economy and an increase in unemployment. As you said so, For example, in the early nineteen nineties, the unemployment rate climbed to about eleven percent as the RBA jacked up the cash rate to seventeen and a half percent to get inflation under control, and almost all economists consider that high interest rates were one of the
causes of the early nineteen nineties recession. This time around, we did get a sharp slow down in consumer spending, but we just never really got the increase in the unemployment rate that people feared. Even today, the jobless rate is four point one percent, which is not terribly far above the multi decade low of three and a half
percent that we saw back in twenty twenty three. There's no particularly good explanation at this point as to why things have happened this way, and I suspect there probably won't be one for a little while. Yet. There are a few explanations floating around that people have at the
moment explaining what's happened. One of them is that the inflation outbreak itself was predominantly a supply driven one, caused by temporary disruptions like the war in Ukraine and post COVID spending boom and supply chain disruptions that were always going to be temporary, So to some extent, inflation was always going to come back down regardless of what the RBA did. Another explanation that people have put forward is that government spending has plugged sort of a gap that's
emerged in the jobs market. If you break down the jobs data, you can see that there actually has been a slowdown in hiring across the private sector, including in sectors like hospitality. But at the same time, we've just seen massive hiring in healthcare, education, public administration, which are
all primarily government funded industries. So those three sectors, which are referred to as the non markets, said Hector, accounted for about seventy five percent of all new jobs created last year, which is massive for just three industries on their own. So if you look at the aggregate jobs market figures, it does look really healthy and really remarkable, but a lot of the job's gains have been really narrowly focused, so it's perhaps not as big a mystery as it may seem on the face of it.
So what does last week's interest rate cut and the expectation of more to come mean for house prices? Do you think we could see the housing market take off again?
Historically when interest rates fall, house prices go up. And I think most economists agree that something's going to happen to house prices over the next twelve to twenty four months, but it's just notoriously difficult to put a number on that with any degree of accuracy. There's a camp of economists who think any upswing will be pretty modest. You know, maybe prices could rise by three to four percent over
the next year or so. This camp say that housing has just become so unaffordable that even with the cash rate being cut a few times this year, it's still going to be really difficult for people to buy into capital city property markets, which have just become so expensive. Nevertheless, there are some economists who are a bit more bullish.
Peter Monkton at the Bank of Queensland has recently looked at what happened over the past forty years worth of interest rate cutting cycles, and based on that analysis, he thinks we're looking at a ten to fifteen percent increase in property prices over the next couple of years. And as someone looking for a house at the moment, I'm quite depressed at that thought.
It's quite a big increase.
Yeah, His reasoning is interesting and pretty clear. He says that the instances where interest rates were cut and then prices rose by thirty percent or more were exceptional and quite unlikely to repeat themselves. So that includes COVID, where the cash rate was at zero percent and then in the nineteen eighties rose by sixty percent, but that was
largely related to the deregulation of the financial system. On the flip side, Moncton argues the instances where interest rates were cut and then house price growth was very low in the early eighties and the early nineties were also unlikely to be repeated. In both of those cases, the unemployment rate was above ten percent and the economy was generally quite weak, which really couldn't be more different to
the current moment. Where As we were discussing earlier, we've got one of the strongest jobs markets that we've seen in decades. So based on all that, Moncton thinks that ten to fifteen percent seemed a pretty reasonable guess for price growth over the next couple of years. And then adding to that backdrop of lower rates, we've got this multi year problem where we haven't been building enough new supply.
And then from January one, we've got a new federal government initiative that will come into place where virtually all first home buyers will be allowed to enter the property market with a five percent deposit. We don't know how material that will be for prices, but everyone does agree it will raise them. It's just really a question of how much.
Let's talk about that policy, Mike, explain exactly what will change and how it will increase prices.
It's called the First home Buyer Guarantee Scheme and Labor has essentially pledged to overhaul it. It's a Morrison era program and it spares first home buyers from having to pay lenders mortgage insurance or LMI through a tax payer backed guarantee. Buyers who participate in the scheme they chip in a five percent deposit and then taxpayers guarantee another
fifteen percent of the purchase price for the property. So then if you put that together, you've got twenty percent, which is about twenty three thousand dollars for the average first home buyer, so it's pretty helpful for those who
can access it. During the election campaign, Prime Minister Anthony Albanezi promised to effectively turbocharge the program by scrapping the income cap, making it available to an unlimited number of applicants instead of just thirty five thousand per year, and also dramatically raising property price thresholds so it would be
available to a larger pool of potential property purchases. For all intents and purposes, the program is effectively becoming unmeans tested and unlimited, and so that will inevitably increase first home buyer demand, which should increase property prices. You would expect that the effect would be localized on the kind of properties that first home buyers tend to buy, which are often on the outskirts of cities, apartments, things that
are a bit more affordable. But just because something happens in one part of the property market, it can still filter through to other parts. You know, you might just push some people who've been looking at first home buyer style properties up into the next year, so it can still filter through and have price effects in other parts of the market.
And as the policies likely to give first home buyers a leg up and boost demand for housing, as you say, and increase prices, is it being matched by government policies to increase supply.
When Labor announced the policy, you could tell that they are acutely aware of the criticism that it would lead to higher house prices. So it was accompanied by a pledge to build one hundred thousand new homes dedicated exclusively to first home buyers. But the problem with that accompanying pledge is that that extra supply could take years to arrive, if it arrives at all, whereas this policy to expand the home buyer Guarantee scheme will be enacted instantly from
January one. It's also worth bearing in mind that when Labour came into government back in twenty twenty two, they promised that they would build one point two million new homes by twenty twenty nine, still in that period at the moment, but no one, including the government's independent Housing Supply advisor, thinks that they're going to achieve that. So how on earth they're going to achieve the extra one hundred thousand homes they've just promised, is anyone's guess. Look,
the government isn't deliberately trying to inflate house prices. I think everyone has good intentions when it comes to property in housing affordability. It's just that governments tend to resort to these demand side schemes because they can be seen to be doing something, and they're really quick and easy to enact, whereas building more homes and increasing the supply pipeline.
That's much less sexy and it takes a really long time to get right, and voters aren't going to thank you for it, even though we all know that these
demand side programs just lead to higher prices. Look, I think if prices do start to rise again, and they start to rise quickly, you could see a world where state governments, especially start resorting to their old tricks like increasing first home by grants or stamp duty waivers and the like, just to look like they're trying to do something, even though we know that over time that will just make the problem worse and could send prices surging even higher.
Mike, we're talking about last week's decision by the Central Bank to cut interest rates and the effect that we'll have on the housing market. If house prices do start to surge again, will the Central Bank factor that into their next interesst rate decision.
This sounds quite cruel, Lisa, But the RBA doesn't actually care what happens to house prices. Michelle Bullock said as much last week at a press conference. The RBA cares about inflation, and it cares about the jobs market, and whatever happens to house prices as a result of its actions is not its problem. The RBA only has one tool at its disposal, which is the cash rate, and it can't simultaneously use the cash rate to target low inflation,
full employment, and low house prices. Just imagine a hypothetical world where the RBA did care about keeping house prices down. That would entail leaving interest rates higher than they otherwise would be, but that could potentially bring it into conflict with its jobs and inflation mandates if the economy was slowing and it found itself in an environment where lower
interest rates were actually the appropriate response. And as Michelle Bullock said last week, housing affordability is fundamentally an issue that can only be resolved by governments and the RBA just has to take house prices as a given when it makes its decisions. So it's not to say the RBA ignores the property market. It looks at it in a lot of detail. In particular, it cares about mortgage debt to the extent that it looks at loan quality.
So it puts a lot of effort into researching and analyzing just how safe loans are that are being written today, what's the likelihood of default, and what does that mean for the stability of the financial system. If the RBA thinks that things are getting risky in terms of the quality of mortgages and the quality of people taking on loans, then it does work with the credential Regulator APRA to tighten lending standards. But it doesn't do that because it's
worried about house prices. It's doing that because it's worried about the stability of the banking system.
So if house prices and housing affordability is a problem for the governments, not the central Bank, and if increasing supply takes years, what else can the government do in the meantime to address housing affordability.
In the short term? I think I mean starting with renters because they often get forgotten in these sorts of conversations. One of the things that the federal government could do is further increase rent assistance. It has already done that in recent budgets, but rent assistance is widely viewed among economists as one of the most effective federal government transfer payments because it quite directly goes to those who need
it most. But over the long run, for both renters and housing prices, supply really is the only silver bullet to this, and it's up to the federal government to sort of take on that coordinating role to corral states and local governments into streamlining planning and approvals. There are a few other interventions that get thrown around from time to time, particularly around reigning in negative gearing and the
capital gains tax discount. There's probably some reasons to do the CGT discount and the interest of tax reform, but there's not really a wealth of evidence suggests that it would lead to a meaningful effect on lowering property prices, and their efforts would probably be better spent boosting housing supply.
As you've said, Mike, the RBA doesn't really care what happens to house prices. So what is it focused on at the moment? Is it all geopolitics? Is it all what the prospect of a China US trade war means for the global economy and the Australian economy in.
Terms of the economic outlook. The Quarterly Statement on Monetary Policy, which came out alongside the RBA's decision, it used the word uncertain about one hundred and thirty times.
Now since our last meeting, global economic and policy uncertainty has increased substantially, massive uncertainty. Uncertainty, uncertainty, Yes, more uncertainty than.
Usual, which is probably a record because absolutely no one really has any good sense of whether the global economy is heading as a result of Trump's tariffs.
And we're not the only ones, I think. The Bank of England tripled the number of uses of the word uncertainty in their equivalent of our Statement on Monetary Policy.
To get its head around what it all means. The RBA did some scenario analysis in the Statement on Monetary Policy to highlight different directions the economy could head as a result of the trade war. There were three different scenarios. The first was a piece in our world scenario where all of the negotiations are successful, and the US drops
its tariffs back to twenty twenty four levels. In that Goldilock's case, you would see the jobs market would remain strong, GDP growth would increase by a little bit more than we're expecting, and we'd all move on with our lives. The second scenario was the opposite. It was a full blown trade war where Trump reimposed those Liberation Day tariffs that were announced in eight pri all countries retaliated with their own higher tariffs. That would be a truly devastating scenario.
We would see growth slow sharply. The RBA found that in that situation, the unemployment rate would rise to about six percent, which would be worse than the global financial crisis, and then we would see governments around the world needing
to respond with stimulus. The third scenario is the baseline scenario that it thinks is the most useful way to look at the period ahead, which is essentially just that the current tariff rates remain and that the Chinese government mitigates some of the worst effect of the tariffs with
fiscal stimulus. Under that scenario, the RBA expects that growth will increase from here, just because it has been incredibly weak, and it is now cutting interest rates, but it's not really expecting GDP growth to hit the level that it might have thought before the trade war started. It's expecting that a lot of the uncertainty core by the trade war might cause some businesses to rethink investments, it might cause consumers to save a bit more than they would
have otherwise. And so by the end of the year, the RBA staff really only see economic growth getting to about two percent from its current rate of one point three percent. So while that is an increase, it's still well below long run averages, and it's really not particularly impressive by any means, and it's somewhat symptomatic of an economy where we don't really have a lot going for
us at the moment. You know, Structurally, we've had no productivity growth in almost a decade, and a lot of recent activity has been quite narrowly focused in government spending, you know. Paul Bloxham, the chief economist at HSBC. He estimates that governments have accounted for about seventy percent of GDP growth over the past two and a half years, while the private sector has been quite subdued.
So Mike given those challenges. What's your outlook for the economy and what does that mean for the housing market, but also your own house hunting.
I think the baseline scenario does seem like the most reasonable one, and the RBA is on the money there. Obviously, no one can forecast what Trump will do next, but it's hard to see the trade war suddenly being resolved. But it's also hard seeing Trump suddenly bringing back the full Liberation Day tariffs, given how severe the market reaction
was to that back in April. So if we are living in this baseline scenario world, it is reasonable to expect the RBA will be in a position to cut interest rates a few times over the next six months or so, as it grows comfortable that inflation is back in the target range and that it doesn't need to keep monetary policy as restrictive as it had been over
the past couple of years. In terms of what it means for the housing market, I'm not going to put a number on price growth because it will inevitably be incorrect. But you know, I would say that history just shows that when interest rates go down, prices go up, and there's no compelling case as to why this time should be any different. So yeah, in terms of what that means for me, I should probably better get cracking and actually buy a place.
Well, thanks for coming on the podcast and good luck.
Thanks Lisa, happy to join.
Thank you for listening to The Finn. I'm Lisa Murray with Financial Review economics correspondent Michael Reid joining the podcast today. This episode was the last for our formidable head of podcast, lap Fan, who is moving on to his next big adventure in Vietnam. We're very sorry to see him go, but wish him and his family all the best. The Finn is produced by Alex Gau and lap Fan. Fiona Buffini is head of Premium Content. Our theme is by
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