Crucial interest rate hikes to manage inflation in the economy are weighing heavy on Australia’s generally robust housing market, the Reserve Bank says.
The RBA raised the cash rate earlier this month for a third consecutive time in a move favoured by eight of its nine monetary policy board members.
Now, newly published minutes from the 5 May meeting reveal the housing market has been the first area to feel the effects of rate rises in February and March.
The bank acknowledged softening property market conditions was the “most immediate effect” of its policy tightening this year, adding it expects its policy decisions to take longer to make a difference to other financial conditions.
National home prices moved lower in April for the first time since late 2024, when the cash rate was also at its most recent high of 4.35%.
REA Group senior economist Eleanor Creagh called the softening a “turning point” for the housing cycle, which is feeling the force of high inflation, rising rates and the major policy changes announced in last week’s federal budget.
Inflation 'wait and see'
The RBA’s board minutes confirm underlying inflation, which strips out the most volatile price highs and lows in, will be higher over the next two years than it had previously forecast.
"The board is worried that the Iran war may de-anchor inflation expectations and so put additional upward pressure on inflation," Commonwealth Bank senior economist Ashwin Clarke said.
While the measure of underlying inflation, the trimmed mean, has held steady at 3.3% over the last few months, it is expected to stay above the RBA’s 2-3% target range until late 2027.
The RBA monetary policy board says its decision for a third rate rise was based entirely around inflation. Picture: Hu Jingchen/Xinhua
After 11 weeks of war in the Middle East, fuel prices have begun to stabilise after reaching a record high in March, while continuing flow on effects to grocery, goods and services and transport costs have seen consumer confidence plummet.
“The case to raise the cash rate target by 25 basis points centered on the outlook for inflation,” the RBA stated. “Against that backdrop, an increase in the cash rate could provide greater confidence that underlying inflation would return to 2.5% within the forecast period.”
Mr Clarke said the minutes show the RBA feels rates are 'somewhat restrictive', leaving time to see how the Iran War continues to develop and in turn, how Australians respond.
"These statements affirm our expectation that the board is intending to hold [the cash rate] in June," he said.
Budget blues?
Turbulence in the softening housing market is also being exacerbated by sweeping government reforms by way of last week's federal budget.
The mammoth shake up reduces tax incentives for investors via negative gearing and capital gains tax changes, instead shifting support toward first-home buyers and new housing supply.
Investor demand is expected to drop in the coming months - whether improved affordability can be the inverse effect of this remains to be seen as war continues.
The RBA minutes show the bank felt financial conditions in Australia have tightened this year, meaning it is harder and more expensive to borrow money.
Mortgage holders are feeling the pinch from lenders having mostly passed on recent rate hikes, while first home buyers are contending with stricter lending parameters and lower borrowing capacity.
“Conflict in the Middle East and associated rise in fuel prices had contributed to a sharp decline in consumer confidence, consistent with a higher cost of living,” the RBA’s statement read.
“Members determined that the risks to achieving the board’s inflation objective had risen and judged that they were not confident that, at 4.1%, the cash rate would be sufficient to mitigate these risks.”
Speaking in Sydney on Tuesday, RBA assistant governor Sarah Hunter said domestic pressures like wages, rents and intermediate inputs affecting supply and demand in the economy were weighing heavily even without the effects of the Iran War.
RBA assistant governor Sarah Hunter says Australia's problems started long before the Iran War. Picture: NewsWire/Martin Ollman
Headline inflation first started ticking back up last September, reaching a near three-year high in March of 4.6%. It is expected to peak next month.
“When activity outstrips capacity for a time, costs tend to increase as everyone is competing for the economy’s scarce resources,” Ms Hunter said.
Despite this, she was firm the RBA will not deviate from its constroversial and sometimes clashing ‘dual mandate’ objectives as the nation struggles against rising inflation.
“There is no trade-off between achieving sustainable full-employment and stable inflation,” Ms Hunter said.
“The starting point for Australia’s economy is that inflation was already above target before the conflict began.
“The Middle East conflict is a clear external shock. While the duration of the conflict is uncertain, economists generally agree that the disruption in global oil and natural gas markets will lead to higher inflation here.”
The RBA is expecting price growth may slow if households spend less as cost-of-living pressures and uncertainty bite.
Despite this, the minutes state there is “little evidence that overall economic activity in Australia had yet been affected significantly by the conflict in the Middle East”.
“However, survey measures of consumer and business confidence had fallen sharply since the onset of the conflict [and] members discussed the extent to which this might indicate a materially weaker outlook for activity.”
Persian Gulf, Iran. Picture: Getty
With broader cost-of-living trends continuing to be driven by domestic factors, winter is expected to bring a season slowdown in the property market right as headline inflation peaks.
The fallout from the government’s budget, more inflation readings and upcoming labour market data will also play into the RBA’s forecasts ahead of its next meeting.
"We still expect the RBA to remain on hold over the next year," Mr Clarke said.
The Australian Securities Exchange indicator shows markets are pricing in just a 13% chance of a fourth rate hike, as of Monday.
The next cash rate decision will take place on 16 June.
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