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Speaker 1: Three point zero five.

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Speaker 2: There it is the Reserve Bank deciding to slash interest

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Speaker 2: rates by a quarter of a percent. This is the

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Speaker 2: second cut in this current cutting cycle.

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Speaker 3: When interest rates fall, house prices typically rise.

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Speaker 1: Historically, when interest rates fall, house prices go up. There's

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Speaker 1: no compelling case as to why this time should be

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Speaker 1: any different, And as someone looking for a house at

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Speaker 1: the moment, I'm quite depressed at that thought.

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Speaker 3: Some economists expect a modesterize this time around. Others predict

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Speaker 3: it could be up to fifteen percent. But whatever the increase,

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Speaker 3: Reserve Bank Governor Michelle Bullock is not interested.

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Speaker 2: There's nothing the Reserve Bank can do about these affordability

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Speaker 2: issues of housing.

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Speaker 1: The RBA cares about inflation, and it cares about the

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Speaker 1: jobs market, and whatever happens to house prices as a

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Speaker 1: result of its actions is not its problem.

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Speaker 3: Welcome to the Finn. I'm Lisa Murray. Today Economics correspondent

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Speaker 3: Michael Reid on why the Reserve Bank is cutting interest

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Speaker 3: rates and what that means for people like him trying

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Speaker 3: to buy a house. It's Thursday, May twenty nine. Hi, Mike,

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Speaker 3: thanks for coming on the podcast.

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Speaker 1: Good to be here.

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Speaker 3: As always, Lisa So, Mike, as a house hunter and

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Speaker 3: the Financial Reviews economics writer, you're watching interest rates very closely.

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Speaker 3: What did you learn from the Reserve Bank Governor Michelle

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Speaker 3: Bullock last week? Why did the Central Bank cut interest rates?

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Speaker 1: That's right, Lisa. I started my house hunting journey about

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Speaker 1: nine months ago. Now I've seen in that time the

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Speaker 1: RBA switch from inflation fighting mode into interest rate easing mode.

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Speaker 1: Michelle Bullock cut rates in February, which was the first

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Speaker 1: rate cut since November twenty twenty, and she then cut

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Speaker 1: rates again last week for the second time.

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Speaker 2: Today, the board decided to cut the cash rate by

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Speaker 2: twenty five basis points.

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Speaker 1: And that taking the cash rate to three point eighty

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Speaker 1: five percent.

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Speaker 2: Now we've done this because the most recent quarterly CPI

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Speaker 2: confirmed that both headlined and underlying inflation are now under

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Speaker 2: three percent.

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Speaker 1: That rate cut itself wasn't a huge surprise. We were

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Speaker 1: all expecting it. But what was a surprise was that

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Speaker 1: Bullet revealed that the RBA board had considered an even

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Speaker 1: bigger cut of fifty basis points at the meeting.

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Speaker 2: The discussion then was about cut and how big, and

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Speaker 2: there was.

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Speaker 1: A discs which is generally the only thing you'd do

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Speaker 1: if it's an emergency or if you actually think you're

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Speaker 1: a little bit behind the curve. And it was also surprising.

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Speaker 1: In Governor Michelle Bullock's press conference, some of her language

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Speaker 1: signaled that she was much more open to future rate

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Speaker 1: cuts than perhaps we previously realized.

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Speaker 2: Doesn't rule out that we might need to take action

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Speaker 2: in the future, but for now, we felt that was

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Speaker 2: the right number. One.

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Speaker 1: The RBA board's posted statement said it viewed the risks

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Speaker 1: around inflation to have become more balanced, so it was

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Speaker 1: feeling a little bit more relaxed. Bullock signaled that should

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Speaker 1: be pretty happy cutting the cash rate again if inflation

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Speaker 1: basically just stayed where it was, which is what the

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Speaker 1: RBA itself is forecasting. You know, remember it did get

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Speaker 1: as high as seven point eight percent back in December

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Speaker 1: twenty twenty two. I don't think the RBA was seriously

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Speaker 1: on the verge of doing the jumbo zero point five

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Speaker 1: percentage point rate cut option.

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Speaker 2: The board was of the view that twenty five was

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Speaker 2: the right number on this occasion. With inflation in the

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Speaker 2: band and also an employment doing pretty well, we think

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Speaker 2: there is a bit of scope to lower.

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Speaker 1: Interest rates in Bullock's own words, the case for the

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Speaker 1: twenty five basis point cut was much stronger than the

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Speaker 1: fifty basis point one, but the fact the board considered

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Speaker 1: the jumbo rate cut is interesting. Nonetheless, and financial markets

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Speaker 1: have bolstered their bets for or future rate cuts as

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Speaker 1: a result. They say there's a three to four chance

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Speaker 1: that Bullet could cut the cash rate again when the

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Speaker 1: RBA next meets in early July, and they think that

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Speaker 1: by December the cash rate would be down to about

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Speaker 1: three point one percent, So that would be another three

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Speaker 1: rate cuts from here, which would take mortgage rates to

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Speaker 1: around or a little bit above five percent by December.

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Speaker 3: Before we talk about what that means for the economy

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Speaker 3: and for house prices, it's worth noting that the Reserve

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Speaker 3: Bank brought inflation under control without the unemployment rate going up.

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Speaker 3: And that's a good thing, and it's quite unusual. How

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Speaker 3: has it happened?

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Speaker 1: Yeah, Lisa, I don't think anyone would have thought when

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Speaker 1: the inflation outbreak started back in late twenty twenty one

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Speaker 1: that would be able to get back to normal without

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Speaker 1: seeing a large increase in joblessness. It's made all the

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Speaker 1: more impressive when you consider the fact that the recent

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Speaker 1: tightening cycle was one of the fastest ones we've had

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Speaker 1: in several decades to get inflation under control. In the past,

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Speaker 1: generally interest rates have gone up and there's been a

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Speaker 1: sharp slow down in the economy and an increase in unemployment.

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Speaker 1: As you said so, For example, in the early nineteen nineties,

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Speaker 1: the unemployment rate climbed to about eleven percent as the

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Speaker 1: RBA jacked up the cash rate to seventeen and a

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Speaker 1: half percent to get inflation under control, and almost all

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Speaker 1: economists consider that high interest rates were one of the

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Speaker 1: causes of the early nineteen nineties recession. This time around,

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Speaker 1: we did get a sharp slow down in consumer spending,

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Speaker 1: but we just never really got the increase in the

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Speaker 1: unemployment rate that people feared. Even today, the jobless rate

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Speaker 1: is four point one percent, which is not terribly far

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Speaker 1: above the multi decade low of three and a half

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Speaker 1: percent that we saw back in twenty twenty three. There's

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Speaker 1: no particularly good explanation at this point as to why

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Speaker 1: things have happened this way, and I suspect there probably

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Speaker 1: won't be one for a little while. Yet. There are

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Speaker 1: a few explanations floating around that people have at the

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Speaker 1: moment explaining what's happened. One of them is that the

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Speaker 1: inflation outbreak itself was predominantly a supply driven one, caused

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Speaker 1: by temporary disruptions like the war in Ukraine and post

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Speaker 1: COVID spending boom and supply chain disruptions that were always

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Speaker 1: going to be temporary, So to some extent, inflation was

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Speaker 1: always going to come back down regardless of what the

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Speaker 1: RBA did. Another explanation that people have put forward is

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Speaker 1: that government spending has plugged sort of a gap that's

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Speaker 1: emerged in the jobs market. If you break down the

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Speaker 1: jobs data, you can see that there actually has been

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Speaker 1: a slowdown in hiring across the private sector, including in

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Speaker 1: sectors like hospitality. But at the same time, we've just

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Speaker 1: seen massive hiring in healthcare, education, public administration, which are

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Speaker 1: all primarily government funded industries. So those three sectors, which

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Speaker 1: are referred to as the non markets, said Hector, accounted

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Speaker 1: for about seventy five percent of all new jobs created

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Speaker 1: last year, which is massive for just three industries on

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Speaker 1: their own. So if you look at the aggregate jobs

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Speaker 1: market figures, it does look really healthy and really remarkable,

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Speaker 1: but a lot of the job's gains have been really

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Speaker 1: narrowly focused, so it's perhaps not as big a mystery

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Speaker 1: as it may seem on the face of it.

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Speaker 3: So what does last week's interest rate cut and the

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Speaker 3: expectation of more to come mean for house prices? Do

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Speaker 3: you think we could see the housing market take off again?

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Speaker 1: Historically when interest rates fall, house prices go up. And

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Speaker 1: I think most economists agree that something's going to happen

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Speaker 1: to house prices over the next twelve to twenty four months,

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Speaker 1: but it's just notoriously difficult to put a number on

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Speaker 1: that with any degree of accuracy. There's a camp of

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Speaker 1: economists who think any upswing will be pretty modest. You know,

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Speaker 1: maybe prices could rise by three to four percent over

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Speaker 1: the next year or so. This camp say that housing

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Speaker 1: has just become so unaffordable that even with the cash

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Speaker 1: rate being cut a few times this year, it's still

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Speaker 1: going to be really difficult for people to buy into

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Speaker 1: capital city property markets, which have just become so expensive. Nevertheless,

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Speaker 1: there are some economists who are a bit more bullish.

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Speaker 1: Peter Monkton at the Bank of Queensland has recently looked

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Speaker 1: at what happened over the past forty years worth of

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Speaker 1: interest rate cutting cycles, and based on that analysis, he

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Speaker 1: thinks we're looking at a ten to fifteen percent increase

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Speaker 1: in property prices over the next couple of years. And

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Speaker 1: as someone looking for a house at the moment, I'm

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Speaker 1: quite depressed at that thought.

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Speaker 3: It's quite a big increase.

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Speaker 1: Yeah, His reasoning is interesting and pretty clear. He says

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Speaker 1: that the instances where interest rates were cut and then

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Speaker 1: prices rose by thirty percent or more were exceptional and

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Speaker 1: quite unlikely to repeat themselves. So that includes COVID, where

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Speaker 1: the cash rate was at zero percent and then in

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Speaker 1: the nineteen eighties rose by sixty percent, but that was

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Speaker 1: largely related to the deregulation of the financial system. On

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Speaker 1: the flip side, Moncton argues the instances where interest rates

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Speaker 1: were cut and then house price growth was very low

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Speaker 1: in the early eighties and the early nineties were also

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Speaker 1: unlikely to be repeated. In both of those cases, the

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Speaker 1: unemployment rate was above ten percent and the economy was

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Speaker 1: generally quite weak, which really couldn't be more different to

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Speaker 1: the current moment. Where As we were discussing earlier, we've

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Speaker 1: got one of the strongest jobs markets that we've seen

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Speaker 1: in decades. So based on all that, Moncton thinks that

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Speaker 1: ten to fifteen percent seemed a pretty reasonable guess for

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Speaker 1: price growth over the next couple of years. And then

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Speaker 1: adding to that backdrop of lower rates, we've got this

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Speaker 1: multi year problem where we haven't been building enough new supply.

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Speaker 1: And then from January one, we've got a new federal

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Speaker 1: government initiative that will come into place where virtually all

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Speaker 1: first home buyers will be allowed to enter the property

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Speaker 1: market with a five percent deposit. We don't know how

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Speaker 1: material that will be for prices, but everyone does agree

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Speaker 1: it will raise them. It's just really a question of

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Speaker 1: how much.

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Speaker 3: Let's talk about that policy, Mike, explain exactly what will

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Speaker 3: change and how it will increase prices.

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Speaker 1: It's called the First home Buyer Guarantee Scheme and Labor

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Speaker 1: has essentially pledged to overhaul it. It's a Morrison era

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Speaker 1: program and it spares first home buyers from having to

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Speaker 1: pay lenders mortgage insurance or LMI through a tax payer

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Speaker 1: backed guarantee. Buyers who participate in the scheme they chip

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Speaker 1: in a five percent deposit and then taxpayers guarantee another

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Speaker 1: fifteen percent of the purchase price for the property. So

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Speaker 1: then if you put that together, you've got twenty percent,

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Speaker 1: which is about twenty three thousand dollars for the average

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Speaker 1: first home buyer, so it's pretty helpful for those who

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Speaker 1: can access it. During the election campaign, Prime Minister Anthony

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Speaker 1: Albanezi promised to effectively turbocharge the program by scrapping the

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Speaker 1: income cap, making it available to an unlimited number of

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Speaker 1: applicants instead of just thirty five thousand per year, and

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Speaker 1: also dramatically raising property price thresholds so it would be

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Speaker 1: available to a larger pool of potential property purchases. For

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Speaker 1: all intents and purposes, the program is effectively becoming unmeans

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Speaker 1: tested and unlimited, and so that will inevitably increase first

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Speaker 1: home buyer demand, which should increase property prices. You would

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Speaker 1: expect that the effect would be localized on the kind

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Speaker 1: of properties that first home buyers tend to buy, which

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Speaker 1: are often on the outskirts of cities, apartments, things that

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Speaker 1: are a bit more affordable. But just because something happens

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Speaker 1: in one part of the property market, it can still

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Speaker 1: filter through to other parts. You know, you might just

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Speaker 1: push some people who've been looking at first home buyer

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Speaker 1: style properties up into the next year, so it can

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Speaker 1: still filter through and have price effects in other parts

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Speaker 1: of the market.

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Speaker 3: And as the policies likely to give first home buyers

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Speaker 3: a leg up and boost demand for housing, as you say,

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Speaker 3: and increase prices, is it being matched by government policies

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Speaker 3: to increase supply.

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Speaker 1: When Labor announced the policy, you could tell that they

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Speaker 1: are acutely aware of the criticism that it would lead

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Speaker 1: to higher house prices. So it was accompanied by a

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Speaker 1: pledge to build one hundred thousand new homes dedicated exclusively

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Speaker 1: to first home buyers. But the problem with that accompanying

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Speaker 1: pledge is that that extra supply could take years to arrive,

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Speaker 1: if it arrives at all, whereas this policy to expand

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Speaker 1: the home buyer Guarantee scheme will be enacted instantly from

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Speaker 1: January one. It's also worth bearing in mind that when

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Speaker 1: Labour came into government back in twenty twenty two, they

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Speaker 1: promised that they would build one point two million new

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Speaker 1: homes by twenty twenty nine, still in that period at

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Speaker 1: the moment, but no one, including the government's independent Housing

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Speaker 1: Supply advisor, thinks that they're going to achieve that. So

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Speaker 1: how on earth they're going to achieve the extra one

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Speaker 1: hundred thousand homes they've just promised, is anyone's guess. Look,

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Speaker 1: the government isn't deliberately trying to inflate house prices. I

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Speaker 1: think everyone has good intentions when it comes to property

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Speaker 1: in housing affordability. It's just that governments tend to resort

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Speaker 1: to these demand side schemes because they can be seen

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Speaker 1: to be doing something, and they're really quick and easy

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Speaker 1: to enact, whereas building more homes and increasing the supply pipeline.

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Speaker 1: That's much less sexy and it takes a really long

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Speaker 1: time to get right, and voters aren't going to thank

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Speaker 1: you for it, even though we all know that these

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Speaker 1: demand side programs just lead to higher prices. Look, I

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Speaker 1: think if prices do start to rise again, and they

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Speaker 1: start to rise quickly, you could see a world where

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Speaker 1: state governments, especially start resorting to their old tricks like

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Speaker 1: increasing first home by grants or stamp duty waivers and

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Speaker 1: the like, just to look like they're trying to do something,

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Speaker 1: even though we know that over time that will just

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Speaker 1: make the problem worse and could send prices surging even higher.

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Speaker 3: Mike, we're talking about last week's decision by the Central

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Speaker 3: Bank to cut interest rates and the effect that we'll

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Speaker 3: have on the housing market. If house prices do start

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Speaker 3: to surge again, will the Central Bank factor that into

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Speaker 3: their next interesst rate decision.

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Speaker 1: This sounds quite cruel, Lisa, But the RBA doesn't actually

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Speaker 1: care what happens to house prices. Michelle Bullock said as

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Speaker 1: much last week at a press conference. The RBA cares

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Speaker 1: about inflation, and it cares about the jobs market, and

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Speaker 1: whatever happens to house prices as a result of its

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Speaker 1: actions is not its problem. The RBA only has one

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Speaker 1: tool at its disposal, which is the cash rate, and

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Speaker 1: it can't simultaneously use the cash rate to target low inflation,

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Speaker 1: full employment, and low house prices. Just imagine a hypothetical

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Speaker 1: world where the RBA did care about keeping house prices down.

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Speaker 1: That would entail leaving interest rates higher than they otherwise

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Speaker 1: would be, but that could potentially bring it into conflict

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Speaker 1: with its jobs and inflation mandates if the economy was

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Speaker 1: slowing and it found itself in an environment where lower

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Speaker 1: interest rates were actually the appropriate response. And as Michelle

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Speaker 1: Bullock said last week, housing affordability is fundamentally an issue

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Speaker 1: that can only be resolved by governments and the RBA

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Speaker 1: just has to take house prices as a given when

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Speaker 1: it makes its decisions. So it's not to say the

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Speaker 1: RBA ignores the property market. It looks at it in

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Speaker 1: a lot of detail. In particular, it cares about mortgage

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Speaker 1: debt to the extent that it looks at loan quality.

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Speaker 1: So it puts a lot of effort into researching and

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Speaker 1: analyzing just how safe loans are that are being written today,

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Speaker 1: what's the likelihood of default, and what does that mean

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Speaker 1: for the stability of the financial system. If the RBA

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Speaker 1: thinks that things are getting risky in terms of the

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Speaker 1: quality of mortgages and the quality of people taking on loans,

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Speaker 1: then it does work with the credential Regulator APRA to

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Speaker 1: tighten lending standards. But it doesn't do that because it's

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Speaker 1: worried about house prices. It's doing that because it's worried

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Speaker 1: about the stability of the banking system.

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Speaker 3: So if house prices and housing affordability is a problem

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Speaker 3: for the governments, not the central Bank, and if increasing

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Speaker 3: supply takes years, what else can the government do in

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Speaker 3: the meantime to address housing affordability.

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Speaker 1: In the short term? I think I mean starting with

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Speaker 1: renters because they often get forgotten in these sorts of conversations.

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Speaker 1: One of the things that the federal government could do

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Speaker 1: is further increase rent assistance. It has already done that

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Speaker 1: in recent budgets, but rent assistance is widely viewed among

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Speaker 1: economists as one of the most effective federal government transfer

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Speaker 1: payments because it quite directly goes to those who need

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Speaker 1: it most. But over the long run, for both renters

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Speaker 1: and housing prices, supply really is the only silver bullet

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Speaker 1: to this, and it's up to the federal government to

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Speaker 1: sort of take on that coordinating role to corral states

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Speaker 1: and local governments into streamlining planning and approvals. There are

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Speaker 1: a few other interventions that get thrown around from time

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Speaker 1: to time, particularly around reigning in negative gearing and the

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Speaker 1: capital gains tax discount. There's probably some reasons to do

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Speaker 1: the CGT discount and the interest of tax reform, but

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Speaker 1: there's not really a wealth of evidence suggests that it

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Speaker 1: would lead to a meaningful effect on lowering property prices,

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Speaker 1: and their efforts would probably be better spent boosting housing supply.

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Speaker 3: As you've said, Mike, the RBA doesn't really care what

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Speaker 3: happens to house prices. So what is it focused on

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Speaker 3: at the moment? Is it all geopolitics? Is it all

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Speaker 3: what the prospect of a China US trade war means

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Speaker 3: for the global economy and the Australian economy in.

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Speaker 1: Terms of the economic outlook. The Quarterly Statement on Monetary Policy,

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Speaker 1: which came out alongside the RBA's decision, it used the

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Speaker 1: word uncertain about one hundred and thirty times.

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Speaker 2: Now since our last meeting, global economic and policy uncertainty

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Speaker 2: has increased substantially, massive uncertainty. Uncertainty, uncertainty, Yes, more uncertainty than.

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Speaker 1: Usual, which is probably a record because absolutely no one

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Speaker 1: really has any good sense of whether the global economy

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Speaker 1: is heading as a result of Trump's tariffs.

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Speaker 2: And we're not the only ones, I think. The Bank

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Speaker 2: of England tripled the number of uses of the word

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Speaker 2: uncertainty in their equivalent of our Statement on Monetary Policy.

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Speaker 1: To get its head around what it all means. The

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Speaker 1: RBA did some scenario analysis in the Statement on Monetary

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Speaker 1: Policy to highlight different directions the economy could head as

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Speaker 1: a result of the trade war. There were three different scenarios.

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Speaker 1: The first was a piece in our world scenario where

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Speaker 1: all of the negotiations are successful, and the US drops

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Speaker 1: its tariffs back to twenty twenty four levels. In that

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Speaker 1: Goldilock's case, you would see the jobs market would remain strong,

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Speaker 1: GDP growth would increase by a little bit more than

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Speaker 1: we're expecting, and we'd all move on with our lives.

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Speaker 1: The second scenario was the opposite. It was a full

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Speaker 1: blown trade war where Trump reimposed those Liberation Day tariffs

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Speaker 1: that were announced in eight pri all countries retaliated with

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Speaker 1: their own higher tariffs. That would be a truly devastating scenario.

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Speaker 1: We would see growth slow sharply. The RBA found that

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Speaker 1: in that situation, the unemployment rate would rise to about

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Speaker 1: six percent, which would be worse than the global financial crisis,

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Speaker 1: and then we would see governments around the world needing

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Speaker 1: to respond with stimulus. The third scenario is the baseline

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Speaker 1: scenario that it thinks is the most useful way to

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Speaker 1: look at the period ahead, which is essentially just that

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Speaker 1: the current tariff rates remain and that the Chinese government

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Speaker 1: mitigates some of the worst effect of the tariffs with

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Speaker 1: fiscal stimulus. Under that scenario, the RBA expects that growth

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Speaker 1: will increase from here, just because it has been incredibly weak,

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Speaker 1: and it is now cutting interest rates, but it's not

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Speaker 1: really expecting GDP growth to hit the level that it

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Speaker 1: might have thought before the trade war started. It's expecting

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Speaker 1: that a lot of the uncertainty core by the trade

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Speaker 1: war might cause some businesses to rethink investments, it might

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Speaker 1: cause consumers to save a bit more than they would

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Speaker 1: have otherwise. And so by the end of the year,

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Speaker 1: the RBA staff really only see economic growth getting to

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Speaker 1: about two percent from its current rate of one point

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Speaker 1: three percent. So while that is an increase, it's still

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Speaker 1: well below long run averages, and it's really not particularly

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Speaker 1: impressive by any means, and it's somewhat symptomatic of an

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Speaker 1: economy where we don't really have a lot going for

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Speaker 1: us at the moment. You know, Structurally, we've had no

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Speaker 1: productivity growth in almost a decade, and a lot of

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Speaker 1: recent activity has been quite narrowly focused in government spending,

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Speaker 1: you know. Paul Bloxham, the chief economist at HSBC. He

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Speaker 1: estimates that governments have accounted for about seventy percent of

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Speaker 1: GDP growth over the past two and a half years,

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Speaker 1: while the private sector has been quite subdued.

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Speaker 3: So Mike given those challenges. What's your outlook for the

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Speaker 3: economy and what does that mean for the housing market,

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Speaker 3: but also your own house hunting.

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Speaker 1: I think the baseline scenario does seem like the most

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Speaker 1: reasonable one, and the RBA is on the money there. Obviously,

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Speaker 1: no one can forecast what Trump will do next, but

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Speaker 1: it's hard to see the trade war suddenly being resolved.

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Speaker 1: But it's also hard seeing Trump suddenly bringing back the

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Speaker 1: full Liberation Day tariffs, given how severe the market reaction

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Speaker 1: was to that back in April. So if we are

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Speaker 1: living in this baseline scenario world, it is reasonable to

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Speaker 1: expect the RBA will be in a position to cut

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Speaker 1: interest rates a few times over the next six months

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Speaker 1: or so, as it grows comfortable that inflation is back

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Speaker 1: in the target range and that it doesn't need to

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Speaker 1: keep monetary policy as restrictive as it had been over

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Speaker 1: the past couple of years. In terms of what it

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Speaker 1: means for the housing market, I'm not going to put

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Speaker 1: a number on price growth because it will inevitably be incorrect.

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Speaker 1: But you know, I would say that history just shows

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Speaker 1: that when interest rates go down, prices go up, and

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Speaker 1: there's no compelling case as to why this time should

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Speaker 1: be any different. So yeah, in terms of what that

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Speaker 1: means for me, I should probably better get cracking and

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Speaker 1: actually buy a place.

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Speaker 3: Well, thanks for coming on the podcast and good luck.

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Speaker 1: Thanks Lisa, happy to join.

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Speaker 3: Thank you for listening to The Finn. I'm Lisa Murray

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Speaker 3: with Financial Review economics correspondent Michael Reid joining the podcast today.

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Speaker 3: This episode was the last for our formidable head of podcast,

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Speaker 3: lap Fan, who is moving on to his next big

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Speaker 3: adventure in Vietnam. We're very sorry to see him go,

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Speaker 3: but wish him and his family all the best. The

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Speaker 3: Finn is produced by Alex Gau and lap Fan. Fiona

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