The first Tuesday of the month is a big event in finance and economics and this week was no different with the Reserve Bank lifting the cash rate by another 25 basis points to 2.6%, the highest it has been since July 2013. And yet while it set off another round of Australia’s favourite game of “What does this mean for housing prices?” the decision does suggest that the RBA is being rather mindful of slamming on the economic brakes too hard.
Before we get to house prices (don’t worry, we’ll get there) let’s have a look at what the RBA is saying about wages and what that might mean for interest rates.
Back in March, when the election was called and the cash rate was 0.1%, the RBA suggested “wages growth has picked up but, at the aggregate level, is only around the relatively low rates prevailing before the pandemic”. So far so bleurgh.
In May when the RBA began raising rates it noted that “the Bank’s business liaison suggests that wages growth has been picking up”. This was echoed in June when it claimed the “business liaison program continues to point to a lift in wages growth from the low rates of recent years”. Well that sounds promising – any actual data?
By September, mention of the liaison program had been replaced in favour of a statement that “wages growth has picked up from the low rates of recent years and there are some pockets where labour costs are increasing briskly”.
And yet this week’s statement changed that to “wages growth is continuing to pick up from the low rates of recent years, although it remains lower than in other advanced economies where inflation is higher.”
I guess those pockets of increasing labour costs were both brisk and brief.
Perhaps that is why, rather than continue the run of 50 basis points rises, the bank only lifted rates by 25 basis points, and why expectations for further rates rises dropped quickly.
At the end of last week, the market was expecting the cash rate to hit 4.1%, now it is down to a peak of just over 3.5%:
That would still be a 345 bps rise in little over a year:
It’s clear that the rate rises are having an impact on the housing market.
On Tuesday, the ABS released the latest lending data which showed a one-month 3.4% fall in the value of home loans and a 15.1% fall from 12 months earlier. Overall housing loans, including investment ones, were down 12.5% of last year.
This suggests dwelling prices should fall below last year’s prices:
But while there has been a very big drop in the value of home loans, the actual amount being loaned remains well above where it was before the pandemic:
While the total amount of home loans has fallen dramatically from last year, the average size of the loans tells a more complex story.
Average loans sizes in Victoria and NSW certainly have come off their peaks, but remain above or around where they were last year, while in Queensland, South Australia and Tasmania the average loan size is more than 10% above what it was a year ago:
And average loan size is a very good determinant of average dwelling prices in a state.
In New South Wales the current average loan of $725,000 suggests average dwelling prices in September remain above $1.1m and 30% above the average price of $888,000 of June 2020:
It’s a similar story in Victoria, where the current average home loan of $624,000 suggests an average dwelling price of around $940,000, well above the $748,600 average in June 2020:
In states where the average loan size remains well above last year’s levels, the gap between dwelling prices and where they were when the pandemic hit is even larger:
In Queensland the current average home loan of $523,000 suggests an average dwelling price of around $780,000, which is almost 50% above the average price in June 2020:
All of which is to say that yes the heat is coming out of the housing market, but we need to remember that it wasn’t just on fire last year – it was burning uncontrolled.
The Reserve Bank now looks more likely to ease off its run of raising rates – although as noted last week it does need to keep an eye on what the US Federal Reserve is doing.
But the bank is now having to be more mindful of the fact that wages are not rising as fast as they might have expected, and more rate rises will only serve to keep wages growth down.
House prices are now definitely slowing, but here as well we still see the complexity the RBA has to deal with. While it might be worried about absolutely tanking the housing market, the home loan data shows that the cost of building homes continues to grow as the cost of building materials soars:
Tuesday’s rise this week does appear to be the beginning of the end of rate rises.
But while house prices are falling from their peaks, the long-term problem of housing affordability remains as we continue to have an economy where house prices have risen faster than wages for so long that even a slight fall in prices will do little to repair the damage of the past two years.
Greg Jericho is a Guardian columnist and policy director at the Centre for Future Work