Why the RBA doesn’t want to spill the bad news on house prices
The two people with the strongest grip on Australia’s economic steering wheel, Reserve Bank Australia boss Philip Lowe and federal Treasurer Jim Chalmers are tackling the task of managing community expectations very differently.
Chalmers holds the keys to Australia’s fiscal safe while Lowe, through monetary policy, has his hand on the interest rate rudder. While the treasurer has been oversharing the negative in the lead-up to his maiden budget, Lowe has mostly kept the worst-case scenarios for the economy on the down-low.
But as a freedom of information request that surfaced this week has revealed, the RBA has modelled a potential 20 per cent fall in house prices (peak to trough) – almost double the 11 per cent that Lowe had cited earlier as the likely scenario.
Buyers need to earn tens of thousands more for a median-priced home.Credit:Jason South
The main differentiator between these two outcomes is market sentiment. If homebuyers and investors respond pessimistically about the state of the housing market or the prospect of higher or longer-dated interest rate rises, house prices could slide even lower.
Reserve Bank of Australia (RBA) Governor Philip Lowe.Credit:Alex Ellinghausen
Lowe’s prediction may yet come in closest to the pin, with the downside projection never coming to pass. And there is a chance that the RBA has got it wrong or has misapplied the model it uses to predict house prices.
The internal RBA documents show that it was caught wrong-footed in June when the fall in house prices came in larger than expected. And the RBA’s worst-case is in line with a number of non-RBA economists, who project a fall in house prices that range between 15 per cent and 20 per cent.
Prices may yet turn out to be more resilient, but at the very least, the doubts highlight the extent to which the many ‘unknowables’ in the cauldron are helping drive the housing market.
In the nation’s largest market, Sydney, house prices are already down more than 10 per cent and Melbourne is down 6.4 per cent. On a national basis, the decline from the April peak was 4.8 per cent at the end of September but prices have fallen further over the past three weeks.
And it is worth noting that in the month of September the rate of decline eased – although this may be an aberration rather than a sign of the steep declines easing.
But given that a degree of pessimism or panic plays a significant role in what happens to house prices, it would appear likely that Lowe doesn’t want to spook the horses and make overly negative predictions that become self-fulfilling.
A 20 per cent decrease in prices would lead to a drop in household wealth that is already being hit by falling asset prices including shares, which feed into superannuation balances.
Predictions on house prices and consumer spending have become particularly difficult to predict in the current environment where the sensitivities to higher rates and inflation have been skewed by financial fat stores that many built up over the COVID lockdown periods. The combination of government stimulus and the limited ability for spending left Australians with an additional $270 billion cash buffer.
Treasurer Jim Chalmers says his first budget will be “family-friendly”.Credit:Alex Ellinghausen
Meanwhile, Chalmers has a very different agenda when it comes to managing public expectations. For weeks the treasurer has been at pains to warn people of the dangerous state of the economy.
Only a day out from delivering the federal budget Chalmers has significantly downgraded GDP, seemingly as a precursor to heralding a budget that will be thin on measures to alleviate the growing cost of living pressures.
He is sending a message that despite the short-term tax revenue tailwinds, courtesy of the booming oil and gas industry, they won’t be applied to structural spending policies.
Chalmers doesn’t want to stimulate spending when the RBA is trying its best to keep it in check.
It works for Chalmers to play into the narrative that Labor is a sound economic manager with an eye to delivering measures that tame longer-term deficit. It’s also in his best interest to manage the expectations around the worst-case scenario.
That not only helps avoid disappointment but also potentially leaves the door open for a pleasant surprise come budget night.
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