Finance
Borrowers brace for more pain as housing market sputters: ‘Hold the line’
The Reserve Bank of Australia is facing an incredibly difficult call. The Board meets next week amid continued uncertainty over the war in Iran, and a week out from a Federal Budget expected to contain some big changes. Against that backdrop, it is expected to slug mortgage holders and businesses with a hike in the official cash rate.
But borrowers could – and should – be spared another blow, according to some prognosticators going against the grain. As house prices in major cities are rolling over, certain economic commentators think the RBA should stand pat.
A hike would be the third in a row, but the second since surging fuel prices took hold.
“Because that interest rate increase — or the equivalent — has already come through in higher petrol prices, I reckon they might hold the line,” said David Koch.
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The Economic Director at Compare the Market, and regular Yahoo Finance contributor, believes the bank could wait for at least some of the dust to settle and see what’s in the Federal Budget on May 12.
“They’ll be thinking about whether oil prices will stay high for longer, because if the Middle East crisis resolves itself, oil prices will drop significantly — and that would take a big chunk out of the inflation rate,” he said.
He also pointed to deteriorating conditions in the economy and historically glum consumer sentiment as factors that could reduce demand that caused inflation to tick back up this year in Australia’s productivity constrained economy.
“Consumer confidence has plunged and business confidence has fallen to almost record lows. Consumers cutting their spending is bad for the economy because small businesses start to suffer.
“And bosses not having confidence is bad for the economy too, because they won’t invest and they won’t hire people. So the Reserve Bank doesn’t want to crush consumers and businesses with another interest rate increase,” he said.
The ANZAC Day weekend brought another soft result in auction clearance rates in the country’s biggest housing markets (with Adelaide being a notable exception). In Sydney, auction clearance rates on Saturday were 49 per cent (compared to 63 per cent a year ago) and in Melbourne was 56 per cent (down from 61 per cent the same time last year), according to Domain.
Economist and former advisor to the Gillard government, Stephen Koukoulas, also believes the right move is not to hike, and says a softening housing market could play a part in a surprise decision to hold.
“The loss of momentum in house prices and outright falls now in Sydney and Melbourne is particularly interesting,” he said on Monday.
While he noted the RBA doesn’t target house prices, the overall impact they have on the economy and sentiment is relevant.
“Given the importance of housing for household wealth and the efficient functioning of the banking system, house price falls will start to feature prominently in RBA thinking,” he claimed.
The frequently dovish economist, last week said lifting interest rates further into the already tough conditions for households “would be monetary policy vandalism”.
Ultimately, it could come down to a data point to be unveiled on Wednesday. The first set of inflation numbers since US and Israeli strikes on Iran led to the closure of the Strait of Hormuz and skyrocketing oil prices will be unveiled on Wednesday.
A large inflation spike in March is expected by economists, off the back of sharp increases to petrol and diesel prices which have filtered through to many sectors of the economy.
Commonwealth Bank economists have tipped inflation to rise almost a full percentage point for the month, from 3.7 per cent to 4.6 per cent.
The trimmed mean inflation, which removes the more volatile price increases such as petrol costs, will nudge up from 3.3 per cent to 3.5 per cent, they forecast.
CBA economists, in unison with the other Big Four banks, said the RBA was more likely than not to hike rates again off the back of Wednesday’s inflation data.
“The data will be keenly watched given the RBA is due to hand down its decision on interest rates on May 5, with money markets suggesting a 72 per cent chance of a 25 basis point rate hike,” the bank said.
The Reserve Bank favours the trimmed mean as a true measure of inflation, with the figures already well above the bank’s target band of between two per cent and three per cent.
with AAP
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