WEBVTT - Are house prices about to take off again? 0:00:03.960 --> 0:00:04.800 Three point zero five. 0:00:04.840 --> 0:00:07.800 There it is the Reserve Bank deciding to slash interest 0:00:07.880 --> 0:00:10.520 rates by a quarter of a percent. This is the 0:00:10.680 --> 0:00:14.520 second cut in this current cutting cycle. 0:00:14.560 --> 0:00:18.240 When interest rates fall, house prices typically rise. 0:00:18.840 --> 0:00:23.160 Historically, when interest rates fall, house prices go up. There's 0:00:23.200 --> 0:00:26.279 no compelling case as to why this time should be 0:00:26.320 --> 0:00:28.920 any different, And as someone looking for a house at 0:00:28.920 --> 0:00:31.240 the moment, I'm quite depressed at that thought. 0:00:31.560 --> 0:00:36.640 Some economists expect a modesterize this time around. Others predict 0:00:36.680 --> 0:00:40.120 it could be up to fifteen percent. But whatever the increase, 0:00:40.479 --> 0:00:43.640 Reserve Bank Governor Michelle Bullock is not interested. 0:00:43.880 --> 0:00:47.280 There's nothing the Reserve Bank can do about these affordability 0:00:47.280 --> 0:00:48.159 issues of housing. 0:00:48.280 --> 0:00:51.199 The RBA cares about inflation, and it cares about the 0:00:51.280 --> 0:00:54.440 jobs market, and whatever happens to house prices as a 0:00:54.480 --> 0:01:02.560 result of its actions is not its problem. 0:01:02.880 --> 0:01:07.240 Welcome to the Finn. I'm Lisa Murray. Today Economics correspondent 0:01:07.480 --> 0:01:11.200 Michael Reid on why the Reserve Bank is cutting interest 0:01:11.280 --> 0:01:14.679 rates and what that means for people like him trying 0:01:14.720 --> 0:01:23.280 to buy a house. It's Thursday, May twenty nine. Hi, Mike, 0:01:23.360 --> 0:01:24.760 thanks for coming on the podcast. 0:01:25.000 --> 0:01:25.640 Good to be here. 0:01:25.680 --> 0:01:28.400 As always, Lisa So, Mike, as a house hunter and 0:01:28.440 --> 0:01:32.840 the Financial Reviews economics writer, you're watching interest rates very closely. 0:01:33.120 --> 0:01:36.280 What did you learn from the Reserve Bank Governor Michelle 0:01:36.319 --> 0:01:39.880 Bullock last week? Why did the Central Bank cut interest rates? 0:01:40.280 --> 0:01:43.360 That's right, Lisa. I started my house hunting journey about 0:01:43.440 --> 0:01:46.720 nine months ago. Now I've seen in that time the 0:01:46.800 --> 0:01:52.080 RBA switch from inflation fighting mode into interest rate easing mode. 0:01:52.360 --> 0:01:55.440 Michelle Bullock cut rates in February, which was the first 0:01:55.520 --> 0:01:58.640 rate cut since November twenty twenty, and she then cut 0:01:58.720 --> 0:02:01.000 rates again last week for the second time. 0:02:01.160 --> 0:02:03.760 Today, the board decided to cut the cash rate by 0:02:03.800 --> 0:02:05.400 twenty five basis points. 0:02:05.120 --> 0:02:07.560 And that taking the cash rate to three point eighty 0:02:07.560 --> 0:02:08.359 five percent. 0:02:08.520 --> 0:02:11.760 Now we've done this because the most recent quarterly CPI 0:02:11.919 --> 0:02:15.560 confirmed that both headlined and underlying inflation are now under 0:02:15.600 --> 0:02:16.160 three percent. 0:02:16.600 --> 0:02:19.800 That rate cut itself wasn't a huge surprise. We were 0:02:19.800 --> 0:02:23.560 all expecting it. But what was a surprise was that 0:02:23.600 --> 0:02:27.240 Bullet revealed that the RBA board had considered an even 0:02:27.320 --> 0:02:30.160 bigger cut of fifty basis points at the meeting. 0:02:30.480 --> 0:02:33.440 The discussion then was about cut and how big, and 0:02:33.480 --> 0:02:33.799 there was. 0:02:33.720 --> 0:02:36.440 A discs which is generally the only thing you'd do 0:02:36.520 --> 0:02:38.720 if it's an emergency or if you actually think you're 0:02:38.720 --> 0:02:42.600 a little bit behind the curve. And it was also surprising. 0:02:42.800 --> 0:02:46.040 In Governor Michelle Bullock's press conference, some of her language 0:02:46.280 --> 0:02:49.639 signaled that she was much more open to future rate 0:02:49.720 --> 0:02:52.279 cuts than perhaps we previously realized. 0:02:52.520 --> 0:02:55.080 Doesn't rule out that we might need to take action 0:02:55.160 --> 0:02:57.519 in the future, but for now, we felt that was 0:02:57.560 --> 0:02:58.240 the right number. One. 0:02:58.440 --> 0:03:03.000 The RBA board's posted statement said it viewed the risks 0:03:03.000 --> 0:03:06.360 around inflation to have become more balanced, so it was 0:03:06.360 --> 0:03:09.760 feeling a little bit more relaxed. Bullock signaled that should 0:03:09.800 --> 0:03:12.480 be pretty happy cutting the cash rate again if inflation 0:03:13.080 --> 0:03:16.120 basically just stayed where it was, which is what the 0:03:16.240 --> 0:03:20.320 RBA itself is forecasting. You know, remember it did get 0:03:20.440 --> 0:03:23.520 as high as seven point eight percent back in December 0:03:23.560 --> 0:03:27.680 twenty twenty two. I don't think the RBA was seriously 0:03:27.720 --> 0:03:31.040 on the verge of doing the jumbo zero point five 0:03:31.160 --> 0:03:32.720 percentage point rate cut option. 0:03:32.960 --> 0:03:36.160 The board was of the view that twenty five was 0:03:36.200 --> 0:03:39.240 the right number on this occasion. With inflation in the 0:03:39.280 --> 0:03:43.360 band and also an employment doing pretty well, we think 0:03:43.400 --> 0:03:45.360 there is a bit of scope to lower. 0:03:45.200 --> 0:03:48.000 Interest rates in Bullock's own words, the case for the 0:03:48.040 --> 0:03:51.280 twenty five basis point cut was much stronger than the 0:03:51.320 --> 0:03:54.440 fifty basis point one, but the fact the board considered 0:03:54.440 --> 0:03:58.640 the jumbo rate cut is interesting. Nonetheless, and financial markets 0:03:58.640 --> 0:04:01.600 have bolstered their bets for or future rate cuts as 0:04:01.640 --> 0:04:04.680 a result. They say there's a three to four chance 0:04:04.760 --> 0:04:07.360 that Bullet could cut the cash rate again when the 0:04:07.480 --> 0:04:10.400 RBA next meets in early July, and they think that 0:04:10.440 --> 0:04:13.720 by December the cash rate would be down to about 0:04:13.760 --> 0:04:17.159 three point one percent, So that would be another three 0:04:17.240 --> 0:04:20.280 rate cuts from here, which would take mortgage rates to 0:04:20.720 --> 0:04:23.400 around or a little bit above five percent by December. 0:04:24.080 --> 0:04:26.920 Before we talk about what that means for the economy 0:04:26.960 --> 0:04:30.520 and for house prices, it's worth noting that the Reserve 0:04:30.600 --> 0:04:35.680 Bank brought inflation under control without the unemployment rate going up. 0:04:35.920 --> 0:04:38.839 And that's a good thing, and it's quite unusual. How 0:04:38.839 --> 0:04:39.680 has it happened? 0:04:40.000 --> 0:04:42.680 Yeah, Lisa, I don't think anyone would have thought when 0:04:42.720 --> 0:04:45.599 the inflation outbreak started back in late twenty twenty one 0:04:46.040 --> 0:04:49.120 that would be able to get back to normal without 0:04:49.160 --> 0:04:52.640 seeing a large increase in joblessness. It's made all the 0:04:52.680 --> 0:04:55.760 more impressive when you consider the fact that the recent 0:04:56.200 --> 0:04:59.280 tightening cycle was one of the fastest ones we've had 0:04:59.560 --> 0:05:03.240 in several decades to get inflation under control. In the past, 0:05:03.880 --> 0:05:06.080 generally interest rates have gone up and there's been a 0:05:06.120 --> 0:05:09.520 sharp slow down in the economy and an increase in unemployment. 0:05:09.560 --> 0:05:12.640 As you said so, For example, in the early nineteen nineties, 0:05:13.000 --> 0:05:16.479 the unemployment rate climbed to about eleven percent as the 0:05:16.560 --> 0:05:19.159 RBA jacked up the cash rate to seventeen and a 0:05:19.200 --> 0:05:23.440 half percent to get inflation under control, and almost all 0:05:23.480 --> 0:05:26.480 economists consider that high interest rates were one of the 0:05:26.480 --> 0:05:30.560 causes of the early nineteen nineties recession. This time around, 0:05:30.640 --> 0:05:33.279 we did get a sharp slow down in consumer spending, 0:05:33.680 --> 0:05:35.880 but we just never really got the increase in the 0:05:35.960 --> 0:05:39.719 unemployment rate that people feared. Even today, the jobless rate 0:05:39.920 --> 0:05:43.279 is four point one percent, which is not terribly far 0:05:43.360 --> 0:05:46.040 above the multi decade low of three and a half 0:05:46.040 --> 0:05:49.839 percent that we saw back in twenty twenty three. There's 0:05:50.480 --> 0:05:53.360 no particularly good explanation at this point as to why 0:05:53.440 --> 0:05:56.600 things have happened this way, and I suspect there probably 0:05:56.680 --> 0:06:00.280 won't be one for a little while. Yet. There are 0:06:00.320 --> 0:06:02.640 a few explanations floating around that people have at the 0:06:02.680 --> 0:06:06.159 moment explaining what's happened. One of them is that the 0:06:06.200 --> 0:06:11.680 inflation outbreak itself was predominantly a supply driven one, caused 0:06:11.680 --> 0:06:15.560 by temporary disruptions like the war in Ukraine and post 0:06:15.640 --> 0:06:19.680 COVID spending boom and supply chain disruptions that were always 0:06:19.720 --> 0:06:23.159 going to be temporary, So to some extent, inflation was 0:06:23.320 --> 0:06:26.320 always going to come back down regardless of what the 0:06:26.400 --> 0:06:30.640 RBA did. Another explanation that people have put forward is 0:06:30.680 --> 0:06:33.640 that government spending has plugged sort of a gap that's 0:06:33.640 --> 0:06:36.480 emerged in the jobs market. If you break down the 0:06:36.560 --> 0:06:39.800 jobs data, you can see that there actually has been 0:06:39.839 --> 0:06:43.560 a slowdown in hiring across the private sector, including in 0:06:43.600 --> 0:06:46.919 sectors like hospitality. But at the same time, we've just 0:06:46.960 --> 0:06:53.280 seen massive hiring in healthcare, education, public administration, which are 0:06:53.320 --> 0:06:57.640 all primarily government funded industries. So those three sectors, which 0:06:57.640 --> 0:07:01.280 are referred to as the non markets, said Hector, accounted 0:07:01.279 --> 0:07:04.000 for about seventy five percent of all new jobs created 0:07:04.080 --> 0:07:07.080 last year, which is massive for just three industries on 0:07:07.120 --> 0:07:09.720 their own. So if you look at the aggregate jobs 0:07:09.760 --> 0:07:13.280 market figures, it does look really healthy and really remarkable, 0:07:13.640 --> 0:07:15.800 but a lot of the job's gains have been really 0:07:15.880 --> 0:07:19.920 narrowly focused, so it's perhaps not as big a mystery 0:07:19.920 --> 0:07:22.000 as it may seem on the face of it. 0:07:22.520 --> 0:07:25.880 So what does last week's interest rate cut and the 0:07:26.000 --> 0:07:31.160 expectation of more to come mean for house prices? Do 0:07:31.200 --> 0:07:34.280 you think we could see the housing market take off again? 0:07:34.680 --> 0:07:39.400 Historically when interest rates fall, house prices go up. And 0:07:39.680 --> 0:07:43.160 I think most economists agree that something's going to happen 0:07:43.200 --> 0:07:45.960 to house prices over the next twelve to twenty four months, 0:07:46.360 --> 0:07:48.960 but it's just notoriously difficult to put a number on 0:07:49.040 --> 0:07:52.160 that with any degree of accuracy. There's a camp of 0:07:52.200 --> 0:07:55.480 economists who think any upswing will be pretty modest. You know, 0:07:55.560 --> 0:07:58.720 maybe prices could rise by three to four percent over 0:07:58.720 --> 0:08:02.440 the next year or so. This camp say that housing 0:08:02.440 --> 0:08:05.480 has just become so unaffordable that even with the cash 0:08:05.560 --> 0:08:08.120 rate being cut a few times this year, it's still 0:08:08.160 --> 0:08:10.520 going to be really difficult for people to buy into 0:08:10.600 --> 0:08:15.120 capital city property markets, which have just become so expensive. Nevertheless, 0:08:15.120 --> 0:08:17.280 there are some economists who are a bit more bullish. 0:08:17.560 --> 0:08:21.160 Peter Monkton at the Bank of Queensland has recently looked 0:08:21.160 --> 0:08:23.600 at what happened over the past forty years worth of 0:08:23.680 --> 0:08:27.320 interest rate cutting cycles, and based on that analysis, he 0:08:27.360 --> 0:08:30.600 thinks we're looking at a ten to fifteen percent increase 0:08:30.640 --> 0:08:33.440 in property prices over the next couple of years. And 0:08:33.520 --> 0:08:35.400 as someone looking for a house at the moment, I'm 0:08:35.679 --> 0:08:37.160 quite depressed at that thought. 0:08:37.360 --> 0:08:38.640 It's quite a big increase. 0:08:39.080 --> 0:08:42.679 Yeah, His reasoning is interesting and pretty clear. He says 0:08:42.800 --> 0:08:46.840 that the instances where interest rates were cut and then 0:08:46.960 --> 0:08:50.560 prices rose by thirty percent or more were exceptional and 0:08:50.679 --> 0:08:55.040 quite unlikely to repeat themselves. So that includes COVID, where 0:08:55.400 --> 0:08:58.120 the cash rate was at zero percent and then in 0:08:58.160 --> 0:09:03.080 the nineteen eighties rose by sixty percent, but that was 0:09:03.520 --> 0:09:06.920 largely related to the deregulation of the financial system. On 0:09:06.960 --> 0:09:11.120 the flip side, Moncton argues the instances where interest rates 0:09:11.120 --> 0:09:14.959 were cut and then house price growth was very low 0:09:15.400 --> 0:09:18.880 in the early eighties and the early nineties were also 0:09:19.000 --> 0:09:22.679 unlikely to be repeated. In both of those cases, the 0:09:22.800 --> 0:09:26.440 unemployment rate was above ten percent and the economy was 0:09:26.440 --> 0:09:30.040 generally quite weak, which really couldn't be more different to 0:09:30.080 --> 0:09:33.360 the current moment. Where As we were discussing earlier, we've 0:09:33.400 --> 0:09:35.839 got one of the strongest jobs markets that we've seen 0:09:36.240 --> 0:09:39.600 in decades. So based on all that, Moncton thinks that 0:09:40.080 --> 0:09:43.080 ten to fifteen percent seemed a pretty reasonable guess for 0:09:43.160 --> 0:09:46.640 price growth over the next couple of years. And then 0:09:46.679 --> 0:09:49.360 adding to that backdrop of lower rates, we've got this 0:09:49.920 --> 0:09:53.000 multi year problem where we haven't been building enough new supply. 0:09:53.840 --> 0:09:56.720 And then from January one, we've got a new federal 0:09:56.760 --> 0:10:00.679 government initiative that will come into place where virtually all 0:10:00.760 --> 0:10:03.680 first home buyers will be allowed to enter the property 0:10:03.679 --> 0:10:06.360 market with a five percent deposit. We don't know how 0:10:06.440 --> 0:10:10.120 material that will be for prices, but everyone does agree 0:10:10.280 --> 0:10:12.640 it will raise them. It's just really a question of 0:10:12.679 --> 0:10:13.199 how much. 0:10:14.160 --> 0:10:18.120 Let's talk about that policy, Mike, explain exactly what will 0:10:18.240 --> 0:10:20.880 change and how it will increase prices. 0:10:21.200 --> 0:10:25.679 It's called the First home Buyer Guarantee Scheme and Labor 0:10:25.840 --> 0:10:30.679 has essentially pledged to overhaul it. It's a Morrison era 0:10:31.000 --> 0:10:34.400 program and it spares first home buyers from having to 0:10:34.480 --> 0:10:39.079 pay lenders mortgage insurance or LMI through a tax payer 0:10:39.679 --> 0:10:43.840 backed guarantee. Buyers who participate in the scheme they chip 0:10:43.880 --> 0:10:47.720 in a five percent deposit and then taxpayers guarantee another 0:10:47.760 --> 0:10:50.800 fifteen percent of the purchase price for the property. So 0:10:50.920 --> 0:10:53.040 then if you put that together, you've got twenty percent, 0:10:53.440 --> 0:10:56.040 which is about twenty three thousand dollars for the average 0:10:56.040 --> 0:10:58.800 first home buyer, so it's pretty helpful for those who 0:10:58.880 --> 0:11:02.520 can access it. During the election campaign, Prime Minister Anthony 0:11:02.520 --> 0:11:08.080 Albanezi promised to effectively turbocharge the program by scrapping the 0:11:08.120 --> 0:11:11.640 income cap, making it available to an unlimited number of 0:11:11.640 --> 0:11:14.920 applicants instead of just thirty five thousand per year, and 0:11:15.000 --> 0:11:19.040 also dramatically raising property price thresholds so it would be 0:11:19.080 --> 0:11:23.600 available to a larger pool of potential property purchases. For 0:11:23.640 --> 0:11:27.840 all intents and purposes, the program is effectively becoming unmeans 0:11:27.880 --> 0:11:31.840 tested and unlimited, and so that will inevitably increase first 0:11:31.840 --> 0:11:36.760 home buyer demand, which should increase property prices. You would 0:11:36.760 --> 0:11:40.400 expect that the effect would be localized on the kind 0:11:40.440 --> 0:11:43.360 of properties that first home buyers tend to buy, which 0:11:43.360 --> 0:11:46.880 are often on the outskirts of cities, apartments, things that 0:11:46.920 --> 0:11:51.040 are a bit more affordable. But just because something happens 0:11:51.040 --> 0:11:53.520 in one part of the property market, it can still 0:11:53.559 --> 0:11:55.920 filter through to other parts. You know, you might just 0:11:56.000 --> 0:11:59.000 push some people who've been looking at first home buyer 0:11:59.080 --> 0:12:02.160 style properties up into the next year, so it can 0:12:02.200 --> 0:12:05.199 still filter through and have price effects in other parts 0:12:05.200 --> 0:12:05.800 of the market. 0:12:06.440 --> 0:12:09.480 And as the policies likely to give first home buyers 0:12:09.520 --> 0:12:12.480 a leg up and boost demand for housing, as you say, 0:12:12.520 --> 0:12:16.960 and increase prices, is it being matched by government policies 0:12:17.000 --> 0:12:18.120 to increase supply. 0:12:18.480 --> 0:12:20.880 When Labor announced the policy, you could tell that they 0:12:20.880 --> 0:12:24.480 are acutely aware of the criticism that it would lead 0:12:24.520 --> 0:12:27.560 to higher house prices. So it was accompanied by a 0:12:27.640 --> 0:12:32.400 pledge to build one hundred thousand new homes dedicated exclusively 0:12:32.440 --> 0:12:35.880 to first home buyers. But the problem with that accompanying 0:12:36.000 --> 0:12:39.720 pledge is that that extra supply could take years to arrive, 0:12:40.200 --> 0:12:43.800 if it arrives at all, whereas this policy to expand 0:12:44.120 --> 0:12:47.520 the home buyer Guarantee scheme will be enacted instantly from 0:12:47.600 --> 0:12:51.200 January one. It's also worth bearing in mind that when 0:12:51.280 --> 0:12:54.559 Labour came into government back in twenty twenty two, they 0:12:54.600 --> 0:12:57.400 promised that they would build one point two million new 0:12:57.440 --> 0:13:01.560 homes by twenty twenty nine, still in that period at 0:13:01.559 --> 0:13:06.439 the moment, but no one, including the government's independent Housing 0:13:06.480 --> 0:13:10.280 Supply advisor, thinks that they're going to achieve that. So 0:13:10.440 --> 0:13:12.439 how on earth they're going to achieve the extra one 0:13:12.520 --> 0:13:18.600 hundred thousand homes they've just promised, is anyone's guess. Look, 0:13:18.640 --> 0:13:21.960 the government isn't deliberately trying to inflate house prices. I 0:13:22.000 --> 0:13:26.000 think everyone has good intentions when it comes to property 0:13:26.000 --> 0:13:30.440 in housing affordability. It's just that governments tend to resort 0:13:30.480 --> 0:13:33.640 to these demand side schemes because they can be seen 0:13:33.720 --> 0:13:36.880 to be doing something, and they're really quick and easy 0:13:36.920 --> 0:13:42.240 to enact, whereas building more homes and increasing the supply pipeline. 0:13:42.920 --> 0:13:45.640 That's much less sexy and it takes a really long 0:13:45.720 --> 0:13:48.560 time to get right, and voters aren't going to thank 0:13:48.640 --> 0:13:52.080 you for it, even though we all know that these 0:13:52.120 --> 0:13:57.400 demand side programs just lead to higher prices. Look, I 0:13:57.440 --> 0:14:00.480 think if prices do start to rise again, and they 0:14:00.520 --> 0:14:03.679 start to rise quickly, you could see a world where 0:14:03.760 --> 0:14:08.000 state governments, especially start resorting to their old tricks like 0:14:08.120 --> 0:14:12.040 increasing first home by grants or stamp duty waivers and 0:14:12.080 --> 0:14:14.840 the like, just to look like they're trying to do something, 0:14:15.640 --> 0:14:19.000 even though we know that over time that will just 0:14:19.080 --> 0:14:34.040 make the problem worse and could send prices surging even higher. 0:14:39.000 --> 0:14:42.080 Mike, we're talking about last week's decision by the Central 0:14:42.080 --> 0:14:45.240 Bank to cut interest rates and the effect that we'll 0:14:45.280 --> 0:14:49.760 have on the housing market. If house prices do start 0:14:49.800 --> 0:14:53.840 to surge again, will the Central Bank factor that into 0:14:53.880 --> 0:14:55.800 their next interesst rate decision. 0:14:56.280 --> 0:14:59.680 This sounds quite cruel, Lisa, But the RBA doesn't actually 0:14:59.680 --> 0:15:03.280 care what happens to house prices. Michelle Bullock said as 0:15:03.360 --> 0:15:06.360 much last week at a press conference. The RBA cares 0:15:06.400 --> 0:15:09.800 about inflation, and it cares about the jobs market, and 0:15:09.880 --> 0:15:12.800 whatever happens to house prices as a result of its 0:15:12.840 --> 0:15:16.560 actions is not its problem. The RBA only has one 0:15:16.600 --> 0:15:19.560 tool at its disposal, which is the cash rate, and 0:15:19.600 --> 0:15:24.600 it can't simultaneously use the cash rate to target low inflation, 0:15:25.280 --> 0:15:29.880 full employment, and low house prices. Just imagine a hypothetical 0:15:29.880 --> 0:15:34.320 world where the RBA did care about keeping house prices down. 0:15:34.720 --> 0:15:38.800 That would entail leaving interest rates higher than they otherwise 0:15:38.840 --> 0:15:42.400 would be, but that could potentially bring it into conflict 0:15:42.720 --> 0:15:46.120 with its jobs and inflation mandates if the economy was 0:15:46.200 --> 0:15:49.480 slowing and it found itself in an environment where lower 0:15:49.480 --> 0:15:53.600 interest rates were actually the appropriate response. And as Michelle 0:15:53.600 --> 0:15:57.680 Bullock said last week, housing affordability is fundamentally an issue 0:15:57.720 --> 0:16:00.720 that can only be resolved by governments and the RBA 0:16:00.960 --> 0:16:03.760 just has to take house prices as a given when 0:16:03.760 --> 0:16:07.440 it makes its decisions. So it's not to say the 0:16:07.520 --> 0:16:10.280 RBA ignores the property market. It looks at it in 0:16:10.320 --> 0:16:14.760 a lot of detail. In particular, it cares about mortgage 0:16:14.800 --> 0:16:19.280 debt to the extent that it looks at loan quality. 0:16:19.400 --> 0:16:22.520 So it puts a lot of effort into researching and 0:16:22.560 --> 0:16:27.560 analyzing just how safe loans are that are being written today, 0:16:28.000 --> 0:16:30.920 what's the likelihood of default, and what does that mean 0:16:31.720 --> 0:16:34.920 for the stability of the financial system. If the RBA 0:16:35.000 --> 0:16:37.400 thinks that things are getting risky in terms of the 0:16:37.520 --> 0:16:41.560 quality of mortgages and the quality of people taking on loans, 0:16:41.920 --> 0:16:45.240 then it does work with the credential Regulator APRA to 0:16:45.320 --> 0:16:48.920 tighten lending standards. But it doesn't do that because it's 0:16:48.920 --> 0:16:51.960 worried about house prices. It's doing that because it's worried 0:16:51.960 --> 0:16:53.880 about the stability of the banking system. 0:16:54.200 --> 0:16:58.120 So if house prices and housing affordability is a problem 0:16:58.160 --> 0:17:01.400 for the governments, not the central Bank, and if increasing 0:17:01.480 --> 0:17:05.879 supply takes years, what else can the government do in 0:17:05.920 --> 0:17:09.960 the meantime to address housing affordability. 0:17:09.359 --> 0:17:11.320 In the short term? I think I mean starting with 0:17:11.400 --> 0:17:15.280 renters because they often get forgotten in these sorts of conversations. 0:17:15.760 --> 0:17:17.960 One of the things that the federal government could do 0:17:18.160 --> 0:17:21.400 is further increase rent assistance. It has already done that 0:17:21.440 --> 0:17:25.440 in recent budgets, but rent assistance is widely viewed among 0:17:25.480 --> 0:17:29.040 economists as one of the most effective federal government transfer 0:17:29.080 --> 0:17:32.040 payments because it quite directly goes to those who need 0:17:32.080 --> 0:17:35.200 it most. But over the long run, for both renters 0:17:35.240 --> 0:17:39.439 and housing prices, supply really is the only silver bullet 0:17:39.520 --> 0:17:42.080 to this, and it's up to the federal government to 0:17:42.160 --> 0:17:45.679 sort of take on that coordinating role to corral states 0:17:45.680 --> 0:17:50.280 and local governments into streamlining planning and approvals. There are 0:17:50.280 --> 0:17:53.680 a few other interventions that get thrown around from time 0:17:53.720 --> 0:17:57.840 to time, particularly around reigning in negative gearing and the 0:17:57.840 --> 0:18:01.800 capital gains tax discount. There's probably some reasons to do 0:18:02.680 --> 0:18:05.840 the CGT discount and the interest of tax reform, but 0:18:05.880 --> 0:18:08.000 there's not really a wealth of evidence suggests that it 0:18:08.040 --> 0:18:11.840 would lead to a meaningful effect on lowering property prices, 0:18:11.880 --> 0:18:15.879 and their efforts would probably be better spent boosting housing supply. 0:18:16.240 --> 0:18:19.000 As you've said, Mike, the RBA doesn't really care what 0:18:19.040 --> 0:18:22.480 happens to house prices. So what is it focused on 0:18:22.800 --> 0:18:25.440 at the moment? Is it all geopolitics? Is it all 0:18:25.960 --> 0:18:29.040 what the prospect of a China US trade war means 0:18:29.119 --> 0:18:32.160 for the global economy and the Australian economy in. 0:18:32.160 --> 0:18:36.560 Terms of the economic outlook. The Quarterly Statement on Monetary Policy, 0:18:36.960 --> 0:18:40.000 which came out alongside the RBA's decision, it used the 0:18:40.040 --> 0:18:42.520 word uncertain about one hundred and thirty times. 0:18:42.960 --> 0:18:47.080 Now since our last meeting, global economic and policy uncertainty 0:18:47.119 --> 0:18:52.640 has increased substantially, massive uncertainty. Uncertainty, uncertainty, Yes, more uncertainty than. 0:18:52.600 --> 0:18:57.960 Usual, which is probably a record because absolutely no one 0:18:58.200 --> 0:19:00.880 really has any good sense of whether the global economy 0:19:00.920 --> 0:19:04.200 is heading as a result of Trump's tariffs. 0:19:03.800 --> 0:19:05.680 And we're not the only ones, I think. The Bank 0:19:05.720 --> 0:19:07.840 of England tripled the number of uses of the word 0:19:07.920 --> 0:19:11.280 uncertainty in their equivalent of our Statement on Monetary Policy. 0:19:13.200 --> 0:19:15.960 To get its head around what it all means. The 0:19:16.080 --> 0:19:19.880 RBA did some scenario analysis in the Statement on Monetary 0:19:19.880 --> 0:19:24.560 Policy to highlight different directions the economy could head as 0:19:24.560 --> 0:19:28.639 a result of the trade war. There were three different scenarios. 0:19:29.080 --> 0:19:32.399 The first was a piece in our world scenario where 0:19:32.760 --> 0:19:36.600 all of the negotiations are successful, and the US drops 0:19:36.600 --> 0:19:39.640 its tariffs back to twenty twenty four levels. In that 0:19:39.960 --> 0:19:43.680 Goldilock's case, you would see the jobs market would remain strong, 0:19:44.320 --> 0:19:46.840 GDP growth would increase by a little bit more than 0:19:46.840 --> 0:19:49.919 we're expecting, and we'd all move on with our lives. 0:19:50.600 --> 0:19:54.080 The second scenario was the opposite. It was a full 0:19:54.119 --> 0:19:58.840 blown trade war where Trump reimposed those Liberation Day tariffs 0:19:58.840 --> 0:20:02.320 that were announced in eight pri all countries retaliated with 0:20:02.359 --> 0:20:06.760 their own higher tariffs. That would be a truly devastating scenario. 0:20:06.880 --> 0:20:10.879 We would see growth slow sharply. The RBA found that 0:20:10.960 --> 0:20:14.639 in that situation, the unemployment rate would rise to about 0:20:14.680 --> 0:20:18.080 six percent, which would be worse than the global financial crisis, 0:20:18.160 --> 0:20:20.200 and then we would see governments around the world needing 0:20:20.240 --> 0:20:25.280 to respond with stimulus. The third scenario is the baseline 0:20:25.320 --> 0:20:28.240 scenario that it thinks is the most useful way to 0:20:28.240 --> 0:20:31.000 look at the period ahead, which is essentially just that 0:20:31.080 --> 0:20:35.080 the current tariff rates remain and that the Chinese government 0:20:35.240 --> 0:20:38.199 mitigates some of the worst effect of the tariffs with 0:20:38.280 --> 0:20:43.520 fiscal stimulus. Under that scenario, the RBA expects that growth 0:20:43.560 --> 0:20:47.399 will increase from here, just because it has been incredibly weak, 0:20:47.720 --> 0:20:50.439 and it is now cutting interest rates, but it's not 0:20:50.480 --> 0:20:53.199 really expecting GDP growth to hit the level that it 0:20:53.320 --> 0:20:57.399 might have thought before the trade war started. It's expecting 0:20:57.440 --> 0:21:01.119 that a lot of the uncertainty core by the trade 0:21:01.119 --> 0:21:05.280 war might cause some businesses to rethink investments, it might 0:21:05.320 --> 0:21:07.520 cause consumers to save a bit more than they would 0:21:07.560 --> 0:21:10.120 have otherwise. And so by the end of the year, 0:21:10.400 --> 0:21:14.600 the RBA staff really only see economic growth getting to 0:21:14.680 --> 0:21:17.879 about two percent from its current rate of one point 0:21:17.960 --> 0:21:21.679 three percent. So while that is an increase, it's still 0:21:22.240 --> 0:21:25.400 well below long run averages, and it's really not particularly 0:21:25.480 --> 0:21:29.000 impressive by any means, and it's somewhat symptomatic of an 0:21:29.080 --> 0:21:31.840 economy where we don't really have a lot going for 0:21:31.920 --> 0:21:35.119 us at the moment. You know, Structurally, we've had no 0:21:35.280 --> 0:21:38.720 productivity growth in almost a decade, and a lot of 0:21:38.760 --> 0:21:42.760 recent activity has been quite narrowly focused in government spending, 0:21:43.000 --> 0:21:46.199 you know. Paul Bloxham, the chief economist at HSBC. He 0:21:46.400 --> 0:21:49.520 estimates that governments have accounted for about seventy percent of 0:21:49.600 --> 0:21:52.520 GDP growth over the past two and a half years, 0:21:52.560 --> 0:21:54.880 while the private sector has been quite subdued. 0:21:55.240 --> 0:22:00.040 So Mike given those challenges. What's your outlook for the 0:22:00.080 --> 0:22:02.840 economy and what does that mean for the housing market, 0:22:03.000 --> 0:22:04.680 but also your own house hunting. 0:22:05.000 --> 0:22:07.680 I think the baseline scenario does seem like the most 0:22:07.760 --> 0:22:11.680 reasonable one, and the RBA is on the money there. Obviously, 0:22:11.680 --> 0:22:14.119 no one can forecast what Trump will do next, but 0:22:14.640 --> 0:22:17.639 it's hard to see the trade war suddenly being resolved. 0:22:17.720 --> 0:22:21.399 But it's also hard seeing Trump suddenly bringing back the 0:22:21.440 --> 0:22:25.399 full Liberation Day tariffs, given how severe the market reaction 0:22:25.680 --> 0:22:28.040 was to that back in April. So if we are 0:22:28.119 --> 0:22:31.760 living in this baseline scenario world, it is reasonable to 0:22:31.840 --> 0:22:34.120 expect the RBA will be in a position to cut 0:22:34.160 --> 0:22:37.280 interest rates a few times over the next six months 0:22:37.400 --> 0:22:40.680 or so, as it grows comfortable that inflation is back 0:22:40.760 --> 0:22:43.320 in the target range and that it doesn't need to 0:22:43.400 --> 0:22:46.280 keep monetary policy as restrictive as it had been over 0:22:46.320 --> 0:22:49.280 the past couple of years. In terms of what it 0:22:49.320 --> 0:22:51.800 means for the housing market, I'm not going to put 0:22:51.800 --> 0:22:54.919 a number on price growth because it will inevitably be incorrect. 0:22:55.240 --> 0:22:57.400 But you know, I would say that history just shows 0:22:57.400 --> 0:23:00.320 that when interest rates go down, prices go up, and 0:23:00.440 --> 0:23:03.680 there's no compelling case as to why this time should 0:23:03.720 --> 0:23:05.760 be any different. So yeah, in terms of what that 0:23:05.800 --> 0:23:08.560 means for me, I should probably better get cracking and 0:23:08.920 --> 0:23:09.879 actually buy a place. 0:23:10.080 --> 0:23:12.480 Well, thanks for coming on the podcast and good luck. 0:23:13.520 --> 0:23:14.920 Thanks Lisa, happy to join. 0:23:23.840 --> 0:23:26.479