Speaker 1: Three point zero five.
Speaker 2: There it is the Reserve Bank deciding to slash interest
Speaker 2: rates by a quarter of a percent. This is the
Speaker 2: second cut in this current cutting cycle.
Speaker 3: When interest rates fall, house prices typically rise.
Speaker 1: Historically, when interest rates fall, house prices go up. There's
Speaker 1: no compelling case as to why this time should be
Speaker 1: any different, And as someone looking for a house at
Speaker 1: the moment, I'm quite depressed at that thought.
Speaker 3: Some economists expect a modesterize this time around. Others predict
Speaker 3: it could be up to fifteen percent. But whatever the increase,
Speaker 3: Reserve Bank Governor Michelle Bullock is not interested.
Speaker 2: There's nothing the Reserve Bank can do about these affordability
Speaker 2: issues of housing.
Speaker 1: The RBA cares about inflation, and it cares about the
Speaker 1: jobs market, and whatever happens to house prices as a
Speaker 1: result of its actions is not its problem.
Speaker 3: Welcome to the Finn. I'm Lisa Murray. Today Economics correspondent
Speaker 3: Michael Reid on why the Reserve Bank is cutting interest
Speaker 3: rates and what that means for people like him trying
Speaker 3: to buy a house. It's Thursday, May twenty nine. Hi, Mike,
Speaker 3: thanks for coming on the podcast.
Speaker 1: Good to be here.
Speaker 3: As always, Lisa So, Mike, as a house hunter and
Speaker 3: the Financial Reviews economics writer, you're watching interest rates very closely.
Speaker 3: What did you learn from the Reserve Bank Governor Michelle
Speaker 3: Bullock last week? Why did the Central Bank cut interest rates?
Speaker 1: That's right, Lisa. I started my house hunting journey about
Speaker 1: nine months ago. Now I've seen in that time the
Speaker 1: RBA switch from inflation fighting mode into interest rate easing mode.
Speaker 1: Michelle Bullock cut rates in February, which was the first
Speaker 1: rate cut since November twenty twenty, and she then cut
Speaker 1: rates again last week for the second time.
Speaker 2: Today, the board decided to cut the cash rate by
Speaker 2: twenty five basis points.
Speaker 1: And that taking the cash rate to three point eighty
Speaker 1: five percent.
Speaker 2: Now we've done this because the most recent quarterly CPI
Speaker 2: confirmed that both headlined and underlying inflation are now under
Speaker 2: three percent.
Speaker 1: That rate cut itself wasn't a huge surprise. We were
Speaker 1: all expecting it. But what was a surprise was that
Speaker 1: Bullet revealed that the RBA board had considered an even
Speaker 1: bigger cut of fifty basis points at the meeting.
Speaker 2: The discussion then was about cut and how big, and
Speaker 2: there was.
Speaker 1: A discs which is generally the only thing you'd do
Speaker 1: if it's an emergency or if you actually think you're
Speaker 1: a little bit behind the curve. And it was also surprising.
Speaker 1: In Governor Michelle Bullock's press conference, some of her language
Speaker 1: signaled that she was much more open to future rate
Speaker 1: cuts than perhaps we previously realized.
Speaker 2: Doesn't rule out that we might need to take action
Speaker 2: in the future, but for now, we felt that was
Speaker 2: the right number. One.
Speaker 1: The RBA board's posted statement said it viewed the risks
Speaker 1: around inflation to have become more balanced, so it was
Speaker 1: feeling a little bit more relaxed. Bullock signaled that should
Speaker 1: be pretty happy cutting the cash rate again if inflation
Speaker 1: basically just stayed where it was, which is what the
Speaker 1: RBA itself is forecasting. You know, remember it did get
Speaker 1: as high as seven point eight percent back in December
Speaker 1: twenty twenty two. I don't think the RBA was seriously
Speaker 1: on the verge of doing the jumbo zero point five
Speaker 1: percentage point rate cut option.
Speaker 2: The board was of the view that twenty five was
Speaker 2: the right number on this occasion. With inflation in the
Speaker 2: band and also an employment doing pretty well, we think
Speaker 2: there is a bit of scope to lower.
Speaker 1: Interest rates in Bullock's own words, the case for the
Speaker 1: twenty five basis point cut was much stronger than the
Speaker 1: fifty basis point one, but the fact the board considered
Speaker 1: the jumbo rate cut is interesting. Nonetheless, and financial markets
Speaker 1: have bolstered their bets for or future rate cuts as
Speaker 1: a result. They say there's a three to four chance
Speaker 1: that Bullet could cut the cash rate again when the
Speaker 1: RBA next meets in early July, and they think that
Speaker 1: by December the cash rate would be down to about
Speaker 1: three point one percent, So that would be another three
Speaker 1: rate cuts from here, which would take mortgage rates to
Speaker 1: around or a little bit above five percent by December.
Speaker 3: Before we talk about what that means for the economy
Speaker 3: and for house prices, it's worth noting that the Reserve
Speaker 3: Bank brought inflation under control without the unemployment rate going up.
Speaker 3: And that's a good thing, and it's quite unusual. How
Speaker 3: has it happened?
Speaker 1: Yeah, Lisa, I don't think anyone would have thought when
Speaker 1: the inflation outbreak started back in late twenty twenty one
Speaker 1: that would be able to get back to normal without
Speaker 1: seeing a large increase in joblessness. It's made all the
Speaker 1: more impressive when you consider the fact that the recent
Speaker 1: tightening cycle was one of the fastest ones we've had
Speaker 1: in several decades to get inflation under control. In the past,
Speaker 1: generally interest rates have gone up and there's been a
Speaker 1: sharp slow down in the economy and an increase in unemployment.
Speaker 1: As you said so, For example, in the early nineteen nineties,
Speaker 1: the unemployment rate climbed to about eleven percent as the
Speaker 1: RBA jacked up the cash rate to seventeen and a
Speaker 1: half percent to get inflation under control, and almost all
Speaker 1: economists consider that high interest rates were one of the
Speaker 1: causes of the early nineteen nineties recession. This time around,
Speaker 1: we did get a sharp slow down in consumer spending,
Speaker 1: but we just never really got the increase in the
Speaker 1: unemployment rate that people feared. Even today, the jobless rate
Speaker 1: is four point one percent, which is not terribly far
Speaker 1: above the multi decade low of three and a half
Speaker 1: percent that we saw back in twenty twenty three. There's
Speaker 1: no particularly good explanation at this point as to why
Speaker 1: things have happened this way, and I suspect there probably
Speaker 1: won't be one for a little while. Yet. There are
Speaker 1: a few explanations floating around that people have at the
Speaker 1: moment explaining what's happened. One of them is that the
Speaker 1: inflation outbreak itself was predominantly a supply driven one, caused
Speaker 1: by temporary disruptions like the war in Ukraine and post
Speaker 1: COVID spending boom and supply chain disruptions that were always
Speaker 1: going to be temporary, So to some extent, inflation was
Speaker 1: always going to come back down regardless of what the
Speaker 1: RBA did. Another explanation that people have put forward is
Speaker 1: that government spending has plugged sort of a gap that's
Speaker 1: emerged in the jobs market. If you break down the
Speaker 1: jobs data, you can see that there actually has been
Speaker 1: a slowdown in hiring across the private sector, including in
Speaker 1: sectors like hospitality. But at the same time, we've just
Speaker 1: seen massive hiring in healthcare, education, public administration, which are
Speaker 1: all primarily government funded industries. So those three sectors, which
Speaker 1: are referred to as the non markets, said Hector, accounted
Speaker 1: for about seventy five percent of all new jobs created
Speaker 1: last year, which is massive for just three industries on
Speaker 1: their own. So if you look at the aggregate jobs
Speaker 1: market figures, it does look really healthy and really remarkable,
Speaker 1: but a lot of the job's gains have been really
Speaker 1: narrowly focused, so it's perhaps not as big a mystery
Speaker 1: as it may seem on the face of it.
Speaker 3: So what does last week's interest rate cut and the
Speaker 3: expectation of more to come mean for house prices? Do
Speaker 3: you think we could see the housing market take off again?
Speaker 1: Historically when interest rates fall, house prices go up. And
Speaker 1: I think most economists agree that something's going to happen
Speaker 1: to house prices over the next twelve to twenty four months,
Speaker 1: but it's just notoriously difficult to put a number on
Speaker 1: that with any degree of accuracy. There's a camp of
Speaker 1: economists who think any upswing will be pretty modest. You know,
Speaker 1: maybe prices could rise by three to four percent over
Speaker 1: the next year or so. This camp say that housing
Speaker 1: has just become so unaffordable that even with the cash
Speaker 1: rate being cut a few times this year, it's still
Speaker 1: going to be really difficult for people to buy into
Speaker 1: capital city property markets, which have just become so expensive. Nevertheless,
Speaker 1: there are some economists who are a bit more bullish.
Speaker 1: Peter Monkton at the Bank of Queensland has recently looked
Speaker 1: at what happened over the past forty years worth of
Speaker 1: interest rate cutting cycles, and based on that analysis, he
Speaker 1: thinks we're looking at a ten to fifteen percent increase
Speaker 1: in property prices over the next couple of years. And
Speaker 1: as someone looking for a house at the moment, I'm
Speaker 1: quite depressed at that thought.
Speaker 3: It's quite a big increase.
Speaker 1: Yeah, His reasoning is interesting and pretty clear. He says
Speaker 1: that the instances where interest rates were cut and then
Speaker 1: prices rose by thirty percent or more were exceptional and
Speaker 1: quite unlikely to repeat themselves. So that includes COVID, where
Speaker 1: the cash rate was at zero percent and then in
Speaker 1: the nineteen eighties rose by sixty percent, but that was
Speaker 1: largely related to the deregulation of the financial system. On
Speaker 1: the flip side, Moncton argues the instances where interest rates
Speaker 1: were cut and then house price growth was very low
Speaker 1: in the early eighties and the early nineties were also
Speaker 1: unlikely to be repeated. In both of those cases, the
Speaker 1: unemployment rate was above ten percent and the economy was
Speaker 1: generally quite weak, which really couldn't be more different to
Speaker 1: the current moment. Where As we were discussing earlier, we've
Speaker 1: got one of the strongest jobs markets that we've seen
Speaker 1: in decades. So based on all that, Moncton thinks that
Speaker 1: ten to fifteen percent seemed a pretty reasonable guess for
Speaker 1: price growth over the next couple of years. And then
Speaker 1: adding to that backdrop of lower rates, we've got this
Speaker 1: multi year problem where we haven't been building enough new supply.
Speaker 1: And then from January one, we've got a new federal
Speaker 1: government initiative that will come into place where virtually all
Speaker 1: first home buyers will be allowed to enter the property
Speaker 1: market with a five percent deposit. We don't know how
Speaker 1: material that will be for prices, but everyone does agree
Speaker 1: it will raise them. It's just really a question of
Speaker 1: how much.
Speaker 3: Let's talk about that policy, Mike, explain exactly what will
Speaker 3: change and how it will increase prices.
Speaker 1: It's called the First home Buyer Guarantee Scheme and Labor
Speaker 1: has essentially pledged to overhaul it. It's a Morrison era
Speaker 1: program and it spares first home buyers from having to
Speaker 1: pay lenders mortgage insurance or LMI through a tax payer
Speaker 1: backed guarantee. Buyers who participate in the scheme they chip
Speaker 1: in a five percent deposit and then taxpayers guarantee another
Speaker 1: fifteen percent of the purchase price for the property. So
Speaker 1: then if you put that together, you've got twenty percent,
Speaker 1: which is about twenty three thousand dollars for the average
Speaker 1: first home buyer, so it's pretty helpful for those who
Speaker 1: can access it. During the election campaign, Prime Minister Anthony
Speaker 1: Albanezi promised to effectively turbocharge the program by scrapping the
Speaker 1: income cap, making it available to an unlimited number of
Speaker 1: applicants instead of just thirty five thousand per year, and
Speaker 1: also dramatically raising property price thresholds so it would be
Speaker 1: available to a larger pool of potential property purchases. For
Speaker 1: all intents and purposes, the program is effectively becoming unmeans
Speaker 1: tested and unlimited, and so that will inevitably increase first
Speaker 1: home buyer demand, which should increase property prices. You would
Speaker 1: expect that the effect would be localized on the kind
Speaker 1: of properties that first home buyers tend to buy, which
Speaker 1: are often on the outskirts of cities, apartments, things that
Speaker 1: are a bit more affordable. But just because something happens
Speaker 1: in one part of the property market, it can still
Speaker 1: filter through to other parts. You know, you might just
Speaker 1: push some people who've been looking at first home buyer
Speaker 1: style properties up into the next year, so it can
Speaker 1: still filter through and have price effects in other parts
Speaker 1: of the market.
Speaker 3: And as the policies likely to give first home buyers
Speaker 3: a leg up and boost demand for housing, as you say,
Speaker 3: and increase prices, is it being matched by government policies
Speaker 3: to increase supply.
Speaker 1: When Labor announced the policy, you could tell that they
Speaker 1: are acutely aware of the criticism that it would lead
Speaker 1: to higher house prices. So it was accompanied by a
Speaker 1: pledge to build one hundred thousand new homes dedicated exclusively
Speaker 1: to first home buyers. But the problem with that accompanying
Speaker 1: pledge is that that extra supply could take years to arrive,
Speaker 1: if it arrives at all, whereas this policy to expand
Speaker 1: the home buyer Guarantee scheme will be enacted instantly from
Speaker 1: January one. It's also worth bearing in mind that when
Speaker 1: Labour came into government back in twenty twenty two, they
Speaker 1: promised that they would build one point two million new
Speaker 1: homes by twenty twenty nine, still in that period at
Speaker 1: the moment, but no one, including the government's independent Housing
Speaker 1: Supply advisor, thinks that they're going to achieve that. So
Speaker 1: how on earth they're going to achieve the extra one
Speaker 1: hundred thousand homes they've just promised, is anyone's guess. Look,
Speaker 1: the government isn't deliberately trying to inflate house prices. I
Speaker 1: think everyone has good intentions when it comes to property
Speaker 1: in housing affordability. It's just that governments tend to resort
Speaker 1: to these demand side schemes because they can be seen
Speaker 1: to be doing something, and they're really quick and easy
Speaker 1: to enact, whereas building more homes and increasing the supply pipeline.
Speaker 1: That's much less sexy and it takes a really long
Speaker 1: time to get right, and voters aren't going to thank
Speaker 1: you for it, even though we all know that these
Speaker 1: demand side programs just lead to higher prices. Look, I
Speaker 1: think if prices do start to rise again, and they
Speaker 1: start to rise quickly, you could see a world where
Speaker 1: state governments, especially start resorting to their old tricks like
Speaker 1: increasing first home by grants or stamp duty waivers and
Speaker 1: the like, just to look like they're trying to do something,
Speaker 1: even though we know that over time that will just
Speaker 1: make the problem worse and could send prices surging even higher.
Speaker 3: Mike, we're talking about last week's decision by the Central
Speaker 3: Bank to cut interest rates and the effect that we'll
Speaker 3: have on the housing market. If house prices do start
Speaker 3: to surge again, will the Central Bank factor that into
Speaker 3: their next interesst rate decision.
Speaker 1: This sounds quite cruel, Lisa, But the RBA doesn't actually
Speaker 1: care what happens to house prices. Michelle Bullock said as
Speaker 1: much last week at a press conference. The RBA cares
Speaker 1: about inflation, and it cares about the jobs market, and
Speaker 1: whatever happens to house prices as a result of its
Speaker 1: actions is not its problem. The RBA only has one
Speaker 1: tool at its disposal, which is the cash rate, and
Speaker 1: it can't simultaneously use the cash rate to target low inflation,
Speaker 1: full employment, and low house prices. Just imagine a hypothetical
Speaker 1: world where the RBA did care about keeping house prices down.
Speaker 1: That would entail leaving interest rates higher than they otherwise
Speaker 1: would be, but that could potentially bring it into conflict
Speaker 1: with its jobs and inflation mandates if the economy was
Speaker 1: slowing and it found itself in an environment where lower
Speaker 1: interest rates were actually the appropriate response. And as Michelle
Speaker 1: Bullock said last week, housing affordability is fundamentally an issue
Speaker 1: that can only be resolved by governments and the RBA
Speaker 1: just has to take house prices as a given when
Speaker 1: it makes its decisions. So it's not to say the
Speaker 1: RBA ignores the property market. It looks at it in
Speaker 1: a lot of detail. In particular, it cares about mortgage
Speaker 1: debt to the extent that it looks at loan quality.
Speaker 1: So it puts a lot of effort into researching and
Speaker 1: analyzing just how safe loans are that are being written today,
Speaker 1: what's the likelihood of default, and what does that mean
Speaker 1: for the stability of the financial system. If the RBA
Speaker 1: thinks that things are getting risky in terms of the
Speaker 1: quality of mortgages and the quality of people taking on loans,
Speaker 1: then it does work with the credential Regulator APRA to
Speaker 1: tighten lending standards. But it doesn't do that because it's
Speaker 1: worried about house prices. It's doing that because it's worried
Speaker 1: about the stability of the banking system.
Speaker 3: So if house prices and housing affordability is a problem
Speaker 3: for the governments, not the central Bank, and if increasing
Speaker 3: supply takes years, what else can the government do in
Speaker 3: the meantime to address housing affordability.
Speaker 1: In the short term? I think I mean starting with
Speaker 1: renters because they often get forgotten in these sorts of conversations.
Speaker 1: One of the things that the federal government could do
Speaker 1: is further increase rent assistance. It has already done that
Speaker 1: in recent budgets, but rent assistance is widely viewed among
Speaker 1: economists as one of the most effective federal government transfer
Speaker 1: payments because it quite directly goes to those who need
Speaker 1: it most. But over the long run, for both renters
Speaker 1: and housing prices, supply really is the only silver bullet
Speaker 1: to this, and it's up to the federal government to
Speaker 1: sort of take on that coordinating role to corral states
Speaker 1: and local governments into streamlining planning and approvals. There are
Speaker 1: a few other interventions that get thrown around from time
Speaker 1: to time, particularly around reigning in negative gearing and the
Speaker 1: capital gains tax discount. There's probably some reasons to do
Speaker 1: the CGT discount and the interest of tax reform, but
Speaker 1: there's not really a wealth of evidence suggests that it
Speaker 1: would lead to a meaningful effect on lowering property prices,
Speaker 1: and their efforts would probably be better spent boosting housing supply.
Speaker 3: As you've said, Mike, the RBA doesn't really care what
Speaker 3: happens to house prices. So what is it focused on
Speaker 3: at the moment? Is it all geopolitics? Is it all
Speaker 3: what the prospect of a China US trade war means
Speaker 3: for the global economy and the Australian economy in.
Speaker 1: Terms of the economic outlook. The Quarterly Statement on Monetary Policy,
Speaker 1: which came out alongside the RBA's decision, it used the
Speaker 1: word uncertain about one hundred and thirty times.
Speaker 2: Now since our last meeting, global economic and policy uncertainty
Speaker 2: has increased substantially, massive uncertainty. Uncertainty, uncertainty, Yes, more uncertainty than.
Speaker 1: Usual, which is probably a record because absolutely no one
Speaker 1: really has any good sense of whether the global economy
Speaker 1: is heading as a result of Trump's tariffs.
Speaker 2: And we're not the only ones, I think. The Bank
Speaker 2: of England tripled the number of uses of the word
Speaker 2: uncertainty in their equivalent of our Statement on Monetary Policy.
Speaker 1: To get its head around what it all means. The
Speaker 1: RBA did some scenario analysis in the Statement on Monetary
Speaker 1: Policy to highlight different directions the economy could head as
Speaker 1: a result of the trade war. There were three different scenarios.
Speaker 1: The first was a piece in our world scenario where
Speaker 1: all of the negotiations are successful, and the US drops
Speaker 1: its tariffs back to twenty twenty four levels. In that
Speaker 1: Goldilock's case, you would see the jobs market would remain strong,
Speaker 1: GDP growth would increase by a little bit more than
Speaker 1: we're expecting, and we'd all move on with our lives.
Speaker 1: The second scenario was the opposite. It was a full
Speaker 1: blown trade war where Trump reimposed those Liberation Day tariffs
Speaker 1: that were announced in eight pri all countries retaliated with
Speaker 1: their own higher tariffs. That would be a truly devastating scenario.
Speaker 1: We would see growth slow sharply. The RBA found that
Speaker 1: in that situation, the unemployment rate would rise to about
Speaker 1: six percent, which would be worse than the global financial crisis,
Speaker 1: and then we would see governments around the world needing
Speaker 1: to respond with stimulus. The third scenario is the baseline
Speaker 1: scenario that it thinks is the most useful way to
Speaker 1: look at the period ahead, which is essentially just that
Speaker 1: the current tariff rates remain and that the Chinese government
Speaker 1: mitigates some of the worst effect of the tariffs with
Speaker 1: fiscal stimulus. Under that scenario, the RBA expects that growth
Speaker 1: will increase from here, just because it has been incredibly weak,
Speaker 1: and it is now cutting interest rates, but it's not
Speaker 1: really expecting GDP growth to hit the level that it
Speaker 1: might have thought before the trade war started. It's expecting
Speaker 1: that a lot of the uncertainty core by the trade
Speaker 1: war might cause some businesses to rethink investments, it might
Speaker 1: cause consumers to save a bit more than they would
Speaker 1: have otherwise. And so by the end of the year,
Speaker 1: the RBA staff really only see economic growth getting to
Speaker 1: about two percent from its current rate of one point
Speaker 1: three percent. So while that is an increase, it's still
Speaker 1: well below long run averages, and it's really not particularly
Speaker 1: impressive by any means, and it's somewhat symptomatic of an
Speaker 1: economy where we don't really have a lot going for
Speaker 1: us at the moment. You know, Structurally, we've had no
Speaker 1: productivity growth in almost a decade, and a lot of
Speaker 1: recent activity has been quite narrowly focused in government spending,
Speaker 1: you know. Paul Bloxham, the chief economist at HSBC. He
Speaker 1: estimates that governments have accounted for about seventy percent of
Speaker 1: GDP growth over the past two and a half years,
Speaker 1: while the private sector has been quite subdued.
Speaker 3: So Mike given those challenges. What's your outlook for the
Speaker 3: economy and what does that mean for the housing market,
Speaker 3: but also your own house hunting.
Speaker 1: I think the baseline scenario does seem like the most
Speaker 1: reasonable one, and the RBA is on the money there. Obviously,
Speaker 1: no one can forecast what Trump will do next, but
Speaker 1: it's hard to see the trade war suddenly being resolved.
Speaker 1: But it's also hard seeing Trump suddenly bringing back the
Speaker 1: full Liberation Day tariffs, given how severe the market reaction
Speaker 1: was to that back in April. So if we are
Speaker 1: living in this baseline scenario world, it is reasonable to
Speaker 1: expect the RBA will be in a position to cut
Speaker 1: interest rates a few times over the next six months
Speaker 1: or so, as it grows comfortable that inflation is back
Speaker 1: in the target range and that it doesn't need to
Speaker 1: keep monetary policy as restrictive as it had been over
Speaker 1: the past couple of years. In terms of what it
Speaker 1: means for the housing market, I'm not going to put
Speaker 1: a number on price growth because it will inevitably be incorrect.
Speaker 1: But you know, I would say that history just shows
Speaker 1: that when interest rates go down, prices go up, and
Speaker 1: there's no compelling case as to why this time should
Speaker 1: be any different. So yeah, in terms of what that
Speaker 1: means for me, I should probably better get cracking and
Speaker 1: actually buy a place.
Speaker 3: Well, thanks for coming on the podcast and good luck.
Speaker 1: Thanks Lisa, happy to join.
Speaker 3: Thank you for listening to The Finn. I'm Lisa Murray
Speaker 3: with Financial Review economics correspondent Michael Reid joining the podcast today.
Speaker 3: This episode was the last for our formidable head of podcast,
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