RBA holds at 3.6%... what does it mean for housing markets?

After cutting interest rates by 75 basis points since February, the RBA has chosen the cautious path at the September board meeting, keeping the cash rate at 3.6%. The decision was widely expected, after the monthly inflation indicator hinted at some ‘upside’ risk to the inflation trajectory, especially from housing costs. However, the RBA is likely to wait for the ‘full’ quarterly inflation update, due for release on the 29th of October (a week ahead of the November board meeting), rather than reading too much into the partials of the monthly inflation indicator.

Persistently tight labour market conditions, where the unemployment rate held at 4.2% in August, was another factor weighing on the RBA Board’s decision. However, with job growth slowing and vacancies trending lower, it’s likely that labour markets will gradually loosen, taking some pressure off wage growth and lessening the need for the RBA to keep rates on hold.

There is a good chance that accelerating housing prices were also a feature of RBA discussions. Since the first rate cut in February, housing markets around the country have seen a positive inflection, sending values 4.7% higher since the first cut of the cycle on February 18th, according to Cotality’s daily Home Value Index. The gains can be seen across every capital city and rest of state region, reversing a softening trend in home values that was generally evident prior to February.

While interest rates have supported the broad-based rise in housing values, other factors are also at play, especially from the supply side. The number of homes for sale in September was hovering around record lows, with total advertised supply down 14.7% on the same time last year and tracking almost 20% below the previous five-year average for this time of the year. Below-average levels of available housing supply are a feature of housing conditions across every capital city.

At the same time, housing demand remains strong. Preliminary estimates on home sales show volumes tracking 2.7% higher than a year ago and 4.2% above the previous five-year average. This disconnect between available supply and demonstrated housing demand is fundamental to understanding the upward trend in housing values.

Although rates are on hold, there is a good chance of another rate cut over the coming months. The RBA next meets on the 3rd and 4th of November. At this meeting, the board will have the benefit of the September quarter CPI data, which will be central to their decision-making. A further cut to interest rates is likely to provide additional support to housing demand from an increase in borrowing capacity and serviceability assessments, but also via higher consumer sentiment.

The expanded Home Guarantee Scheme, which goes live on October 1, featuring higher price caps and no limits on income or places, is another source of additional housing demand. As first home buyers take advantage of the stimulus, we expect to see increased competition for the limited amount of stock in the market, adding to price pressures in the market, especially around the upper limit of the price caps.