This article is from the Australian Property Journal archive
ANALYSTS say the Reserve Bank retained the “mildest of hawkish biases” on interest rates at its March meeting, as it mulled over the failure of housing supply to keep up with surging population growth and the rise of distressed commercial real estate sales overseas.
The RBA held interest rates steady 4.35% at its March meeting, and analysts were quick to note a shift in language towards a more “dovish” tone in response to inflation, economic and employment data.
According to the minutes released yesterday, board members considered that the relative probability of the sets of risks had “become a little more even, as the incoming data had not indicated a materialisation of upside risks to inflation and as growth in output had slowed as expected”.
“On the upside, there remained a risk that inflation would take longer to return to target than currently expected, resulting in an upward shift in inflation expectations,” the minutes stated.
“Members observed that this could occur if aggregate demand continued to exceed supply for longer than anticipated, productivity growth did not increase sustainably or if services price inflation proved stickier than assumed in the forecasts.”
On the other hand, members noted the risk that weakness in consumption could continue for longer than expected.
“In particular, the recovery in real household disposable income growth may not lift consumption growth if households do not respond as expected, perhaps because of a weakening in the labour market. If that occurred, growth in output would be slower than expected and inflation would be likely to decline more quickly.”
The housing crisis continued to be a major source of inflationary pressure as the consumer price index held at 3.4% for a third consecutive month, while analysts suggested the Reserve Bank will “take comfort” in the data in its mission to bring inflation down.
The Australian Bureau of Statistics (ABS)’ February numbers showed rental inflation accelerated to 7.6% on the back of low rental housing supply and record low vacancy rates, while according to CoreLogic house prices rose to new record highs in March.
“Members observed that growth in underlying demand for housing remained brisk relative to supply, which was contributing to rising prices and rents,” the minutes stated.
“On the demand side, population growth remained high and the shift in preferences for more housing space that occurred during the pandemic was yet to unwind, despite worsening affordability.
“On the supply side, new housing had been constrained by ongoing capacity constraints – particularly for finishing trades and where the required skills were easily transferable to non-residential construction – and rapid increases in construction costs. Advertised rents had continued to grow strongly in most capital cities.”
The government is about to launch the National Housing Accord and Housing Australia Future Fund, which together aim to deliver more than 1.2 million homes across the country. However, the task is deemed all but impossible by some due to labour shortages.
ANZ senior economists Catherine Birch and Blair Chapman said the RBA’s March minutes “confirmed that while the Board has moved closer to a neutral stance, it retains the mildest of hawkish biases”.
“We still expect the RBA will be on hold until November, with the possibility of earlier cuts reduced by the very strong February labour market data, which was released after the RBA’s March meeting,” they said.
Capital Economics head of Asia Pacific Marcel Thieliant agreed that rate cuts were unlikely until later in 2024.
“During previous easing cycles the bank lowered interest rates only after discussing rate cuts for several months,” he said.
“We expect the RBA to become the last major central bank to start loosening monetary policy and only expect the first rate cut to come in November.”
Commercial real estate concerns
The board also noted that higher interest rates and ongoing weak demand, particularly for older or lower-quality offices, continued to weigh on conditions in global commercial real estate (CRE) markets. Risks were greater among regional banks in the United States and parts of Europe, including in Germany, where CRE exposures were largest and lending standards had eased over prior years, the minutes said.
“While distressed CRE sales and non-performing loans in international markets had been limited, they could increase in the period ahead as CRE loans had to be refinanced at higher rates in a weaker demand environment.”
The board also noted that further weakness in the Chinese property sector could interact with longstanding macro-financial vulnerabilities, and even impact Australia.
“If stresses in the Chinese economy and financial system intensified or broadened, they could spill over to the rest of the world (including Australia) through trade channels and an increase in global risk aversion.”
