Michele Bullock, governor of the Reserve Bank of Australia (RBA), has flagged risks associated with the rapid recovery in the residential property market over the past nine months.
According to CoreLogic data, national home values have risen 6.6 per cent since bottoming in January 2023, just 1.3 per cent below peak.
Prices rebounded amid continued monetary policy tightening from the RBA, which has lifted rates by a cumulative 400 bps since May 2022.
Ms Bullock told an audience at the Australian Financial Security Authority’s (AFSA) annual forum she is “surprised” by the scale and speed of the property rebound.
She said the fall in housing values following the commencement of monetary policy tightening failed to reverse strong gains of up to 25 per cent during the COVID-19 pandemic.
“[Housing prices] bottomed sooner than we thought and now they’re back to where they were in their peaks of the pandemic,” she said.
She attributed the pick-up to the underlying demand and supply imbalance, with disruptions to the residential constriction sector slowing the development of new housing and, in turn, boosting demand for existing stock.
Upward pressure on rents, she added, has also persuaded a large part of the market to explore opportunities for home ownership.
These upside pressures on demand, Ms Bullock continued, have been exacerbated by below-average property listings.
Reflecting on the broader impact of rising property prices, Ms Bullock warned it is among a number of factors threatening to derail progress to the 2–3 per cent inflation target.
She said higher prices “usually gives people a little bit of confidence their wealth is increasing”, and as a result, could lead to a pick-up in consumption.
This risk was also flagged by the RBA’s monetary policy board in minutes from the October meeting, with members claiming resurgent property prices may suggest current interest rate settings are not sufficiently restrictive.
“[Members] noted that while rising housing prices alone would not warrant tighter policy, the associated rise in household wealth could support consumption by more than currently assumed, especially if housing turnover were to pick up more quickly than expected,” the RBA minutes read.
“The rise in housing prices could also be a signal that the current policy stance was not as restrictive as had been assumed, although there was other evidence that monetary conditions were tight.”
But Gareth Aird, Commonwealth Bank’s head of Australian economics at the global economics and market research division, has dismissed the correlation proposed by the RBA.
“We don’t subscribe to the idea that the increase in home prices is a sign that monetary policy might be less restrictive than assumed,” he said.
“Rather, we think that the recent lift in home prices primarily reflects the massive imbalance between surging population growth (i.e. underlying demand) and supply.
“This mismatch is putting significant upward pressure on rents. And vacancy rates are at record lows in many parts of the country.”
Overall, the RBA’s minutes struck a more hawkish tone, with members stressing a “low tolerance” for slower-than-anticipated progress towards the inflation target.
According to Adam Boyton, head of Australian Economics at ANZ Research, this hawkish tone suggests the November monetary policy board meeting would be “live”.
Mr Boyton said the RBA’s next move would hinge on the results of the next inflation and labour market prints, but warned risks for further tightening are elevated.
“Our view is that a rate rise in November would require an uncomfortably high CPI print, possibly combined with some sign of strength in the labour market,” he said.
“Pending the upcoming labour market and inflation data, we continue to expect the cash rate to remain at 4.1 per cent.
“Risks of RBA action appear to be rising, however.”