It’s the silver lining that’s not making headlines: falling home prices means another Reserve Bank rate hike is less likely.
RBA board members will not be sitting on Monday and Tuesday discussing ways to prop up Sydney house values.
Even so, the RBA’s governor, Michele Bullock, has made it clear that property is on her mind.
The central bank always expected conditions “to ease” in response to the rate hikes in February, March and May, Bullock said last week – after all, that’s usually how these things work.
“But the housing market has eased by more than we had anticipated in May,” she said.
“This appears to reflect a range of factors, including recent policy developments affecting the housing market, and a general softening in housing market sentiment.”
By “recent policy developments”, she means the changes in the budget to property taxes.
Jonathan McMenamin, a senior economist at Barrenjoey, told News24 on Monday that the RBA board will “try and play down the housing market to some degree, but still use that as a reason why they might be able to hold for a longer period of time”.
At this point it’s worth noting that Bullock believes the economy needs to slow further to wrangle inflation back to the central bank’s 2.5% target over the next 12-18 months.
The “key question” for the governor is whether or not this slowdown will be achieved through this year’s three interest rate hikes, or if they will need to do more.
Here’s where we have the silver lining for mortgaged households.
While there is no “mechanical” monetary policy response to dropping property prices, central bank officials are attuned to the knock-on effects to the economy.
From a consumption angle, these come in two forms: the “wealth effect” and what could be called the “turnover effect”.
The first is that when prices go up, people feel wealthier and so are more likely to spend (and vice versa). There’s some evidence of this, and the RBA certainly speaks about it.
The second is that when the property market is running hot, more homes change hands. That has an effect on the buying of goods and services that people typically demand when they move house, like household appliances.
The fewer people moving, the less spending on things like new furniture.
Disentangling the two effects is hard, but the direction of travel in each case is the same.
Falling property values should also weigh on housing construction, although some economists argue that this effect has been blunted by the nationwide push to boost housing supply.
The chief economist at Westpac, Luci Ellis, says the weakness in the housing market provides the RBA with further confirmation that monetary policy is “tight” with the cash rate at 4.35%.
Challenger’s chief economist, Jonathan Kearns, also agrees the property market travails will play into the RBA’s deliberations, if only “very marginally” at a time when inflation is running so hot and there are plenty of other things to worry about.
“I still think there’s a reasonable chance they will need to hike again,” Kearns said.
Still, mortgage holders will take any good news.
And for homeowners sitting on reasonable and sometimes hefty price gains over recent years, avoiding higher borrowing costs might seem worth the recent drop in values.
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