Australia housing runs out of rescuers as RBA is set to hike rates

For decades, Australia's central bank intervened in the housing market by cutting interest rates whenever prices declined, to maintain economic demand and support household spending. However, this year, the Reserve Bank of Australia (RBA) is raising rates, potentially marking the worst downturn in the housing market in a generation. The RBA is set to hike interest rates for the fourth time in September, targeting a 15-year high of 4.6%, according to market participants and most polled economists.

Inflation remains high due to factors such as an overseas war, a surge in data centre demand for goods and services, and sustained government spending on defense and healthcare. These supply-side shocks are proving difficult for monetary policy to manage, leaving inflation elevated for longer than typical downturns would suggest. Despite many Australians struggling financially, a resilient labor market keeps household incomes high, allowing them to continue spending on items like electric vehicles as oil prices rise.

Higher rates are required to keep inflation under control, according to Luke Yeaman, chief economist at Commonwealth Bank of Australia, who expects another rate increase next week. The RBA has raised interest rates three times this year, reaching a post-pandemic high of 4.35%, which helped bring down inflation from a 7.8% peak. However, the housing market signals that tightening measures are already impacting households, with national prices down nearly 4% from their peaks. Economists predict a peak-to-trough fall of 10% for housing prices, the largest in three decades.

HSBC forecasts a 13% drop if rates rise further, while some experts believe a 10% decline would not be enough to stimulate household spending. Reserve Bank of Australia Governor Michele Bullock described the situation as entering a "new world," contrasting it with previous eras of free trade and low inflation. The RBA's challenge is managing inflation while navigating these complex and non-traditional economic pressures.