As global central banks navigate uncharted waters due to inflationary pressures, a perfect storm is brewing within the housing market. Neither economists nor housing analysts dispute that cuts to monetary policy are sending house prices up. They said they are anticipating more cuts, the latter to be announced within days. Skepticism on RBA The Reserve Bank of Australia (RBA) appears set for another cut. This is a huge step to impact affordability and inflation in the consumer market.
Longtime Capital Economics economist Tim Lawless warns against ignoring the link between interest rate cuts and escalating home values. His thinking is that the new momentum in housing markets is a result of previous interest rate cuts. For one, folks are happy that there could be future cuts. As these economic indicators continue to change, the RBA’s decisions may have more widespread impacts—not just in Australia, but around the world.
Anticipated Rate Cuts and Economic Impacts
The financial community is already preparing for the RBA to make further cuts to the cash rate. A significant number of economists are calling a cut in the cash rate to 3.1 percent. Michele Bullock, the recently appointed governor of the RBA, is poised to make her first rate cut any day now. If taken, this historic decision would become the 66th rate cut in the world this year. This expected cut is in line with the trend Japan already set by going first with much more monetary easing that has been the rage around the globe.
“The continued momentum we’re seeing across almost all markets is no doubt being fuelled by rate cuts — both those that have already happened, but also potential cuts in the coming months.” – Tim Lawless
Analysts point to a major change in this regard. Should the RBA drop its cash rate by 25 basis points to 3.6 percent, it would indicate a significant turnaround in monetary policy aimed at improving economic growth. The view among economists is near unanimous in favour of the RBA’s widely anticipated move today.
The Global Context of Monetary Policy
While developed economies grapple with inflation and economic recovery, the RBA’s actions are reflective of a broader trend in financial policy. Many other central banks have taken comparable actions due to economic pressures generated by a perfect storm of multiple factors in recent years.
The Bank of Japan (BoJ) has been particularly aggressive, implementing Quantitative Easing (QE) to inject vast amounts of cash into its economy by purchasing government bonds. Traditionally, this has produced an insatiable wall of money that is ever hungry for investment opportunities. Furthermore, the BoJ’s actions have created a very strong precedent. Other central banks have recently taken a cue from this, particularly in times of crisis.
In the Global Financial Crisis and again in the most recent pandemic, central banks acted quickly and firmly. The US Federal Reserve and the European Central Bank responded with a historic surge in money printing. All the steps that were needed to calm the financial markets have in fact created a distorted asset price bubble. It’s showing no signs of deflating any time soon.
Affordability and Asset Inflation
Reducing interest rates Moves to bring down the overall cost of borrowing are key to making housing more affordable. When rates drop, it makes it more accessible for potential homebuyers to get a mortgage, increasing demand in the housing market. This phenomenon is not only typifying the situation in Australia, but is reflecting trends being seen around the world.
Lawless further points out that interest rates dropped once more in May. The majority of June and maybe even July too will be affected by this drop, with good potential to boost housing values. Over the last 40 years, the supply of money has skyrocketed, causing massive inflation in assets. Consequently, property values continue to soar, despite even the worst national economic downturns.
This crisis-to-crisis cycle is not sustainable in the long term. Deregulation and cash injections following the market flashpoints of 2001, 2008 and 2020 have filled the financial system with firewater. Consequently, there’s an unusual surplus of cash liquidity to invest and lend. Profitable investments are always sought for this capital, but combined with real estate being viewed as a less risky investment during economic tumult, it becomes a preferred option.
