Population surge and smaller households fuelling home prices: RBA

The resilience of the housing market recovery in the face of high interest rates is among a number of factors that could make the RBA reluctant to deliver cuts to the cash rate later this year, according to economists.

The RBA has previously estimated that average household size declined from 2.55 individuals to 2.48 individuals nationally between late 2020 and August 2022, meaning an additional 120,000 homes needed to be built just to accommodate the existing population.

The decline was most pronounced in capital cities, where average household size fell from 2.63 in late 2020 to 2.53 in August 2022.

With property prices increasing by 8.8 per cent in the 12 months to February, UBS chief economist George Tharenou said it seemed likely that values would grow by somewhere between 5 and 7 per cent in 2024.

Stronger than expected house price growth should constrain the RBA’s ability and willingness to cut the cush rate pre-emptively, Mr Tharenou said.

“UBS still expect the RBA to hold the cash rate higher-for-longer; with the first rate cut of 25 basis points not until November 2024. Indeed, if the RBA cuts rates too much and/or too quickly, they run the risk of putting further upward pressure on house prices; and by extension boosting the household wealth effect,” he said.

Adding to housing demand is the record influx of 549,000 temporary migrants in the 12 months to September 2023, which pushed annual population growth to 2.5 per cent, its highest rate since 1952. The migration surge is largely a one-off boost caused by international students and temporary workers returning to Australia following the end of pandemic travel restrictions.

Affordability challenges and high interest rates were pushing low-income and less wealthy households out of the housing market, the RBA board said.

“As a result, the average housing deposit had increased at a faster rate than housing prices, and newer borrowers had higher incomes and lower loan-to-income ratios relative to earlier cohorts.”

Demand outstrips supply

The RBA board kept rates on hold at 4.35 per cent at its March meeting, with the minutes noting the central bank still judged demand was outstripping supply in the latter half of 2023, despite 13 cash rate rises. However, the gap between supply and demand was closing “relatively quickly”.

For the first time during the current tightening cycle, the board did not explicitly consider raising the cash rate at its regular board meeting.

The median forecaster in The Australian Financial Review’s survey of 39 economists shows the RBA will start cutting rates in November, while financial markets project it will happen in September. Both groups have consistently pushed out the timing of the first cut over the past 12 months.

Capital Economics head of Asia Pacific Marcel Thieliant said the RBA would be the last major central bank to start loosening monetary policy.

“During previous easing cycles, the bank lowered interest rates only after discussing rate cuts for several months,” Mr Thieliant said.

“Given the plunge in the unemployment rate and the renewed jump in trimmed mean inflation in February, we doubt the bank will be ready to debate a rate cut at its upcoming meeting in May just yet.”

Progress on lowering inflation prompted the RBA board to shift to a neutral policy stance in its March post-meeting statement, saying “the board is not ruling anything in or out” on the next rate move. In February, the RBA board said that “a further increase in interest rates cannot be ruled out”.

As central banks globally grapple with the so-called last mile of inflation, RBA governor Michele Bullock said at a press conference last month her main concern continued to be the strength of price pressures in the labour-intensive services sector, where costs were increasing rapidly due to a pick-up in nominal wages growth.

The RBA does not expect inflation, currently 3.4 per cent, to return within its 2 to 3 per cent target range until December 2025, and Ms Bullock has signalled little tolerance for any delays.