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Absurd house prices are not our problem, says RBA

·4-min read
RBA Governor Philip Lowe and an aerial shot of an Australian suburb.
RBA Governor Philip Lowe said increasing interest rates is not the way to go to lower rising house prices (Source: Getty)

The Reserve Bank of Australia (RBA) will not lift the cash rate to cool surging house prices, RBA governor Philip Lowe said.

Speaking in an address to the Anika Foundation, Lowe said house prices have surged 19 per cent since the start of the pandemic.

Lowe said raising the cash rate, currently sitting at a record low of 0.1 per cent, is not on the agenda for the bank despite admitting it would help ease prices.

“While it is true that higher interest rates would, all else equal, see lower housing prices, they would also mean fewer jobs and lower wages growth. This is a poor trade-off in the current circumstances,” he said.

Instead, Lowe pointed to a number of public policy issues, which are the responsibility of the Government, that need to be addressed if we want house prices to calm.

“While monetary policy is contributing to higher housing prices at the moment, the way to address these concerns is through the structural factors that influence the value of the land upon which our dwellings are built,” Lowe said.

“The factors include: the design of our taxation and social security systems; planning and zoning restrictions; the type of dwellings that are built; and the nature of our transportation networks.

“These are all obviously areas outside the domain of monetary policy and the central bank.”

Though Lowe falls short of directly criticising the Federal Government in this regard, dozens of property economists and experts have voiced that the lack of cohesive policy around housing has resulted in a ‘triple crisis’.

Wages won’t be rising anytime soon

Another major economic issue outlined by Lowe was that of stagnant wage growth, which has been impacting Aussies for years.

Lowe said wages need to be increasing at least by 3 per cent before the bank considers raising interest rates – a target that we remain “well short of”.

“Even in industries where there has been strong demand for labour, wage increases remain mostly modest,” he said.

“Our judgement is that it will take some time for wage increases to lift to a rate that is consistent with achieving the inflation target.”

A number of factors are to blame for low wages, Lowe added, indicating the long road ahead before we see a lift.

“There is a lot of inertia in the wage-setting process and the experience of the past decade is unlikely to be reversed quickly,” he said.

When will rates rise?

Not until at least 2024, Lowe said. In fact, he dismissed the estimates made by some of the Big Four banks that rates could rise as soon as next year.

“I find it difficult to understand why rate rises are being priced in the next year or in early 2023,” Lowe said.

“While policy rates might be increased in other countries over this time frame, the wage and inflation expectation experience in Australia is quite different to these other countries. What's happening elsewhere in the world doesn't need to apply directly here.”

Lowe said until the unemployment rate lowers, wages are boosted to at least 3 per cent, and home prices come back under control, the bank has no plans to increase the cash rate.

“In today's low inflation world, we do not want to run the risk that we increase the cash rate on the basis of a forecast that ultimately does not come to pass, leaving inflation stuck below the target band,” he said.

“We want to see actual results, not forecasted results, before we lift the cash rate. Once we do see these results, forecasts of inflation will again have a role to play. But we have to get there first.”

Lowe said the bank wants to see inflation around the middle of the target range and said he has “reasonable confidence” it will not fall below the 2 to 3 per cent range again.

“Our judgement is that this condition for a lift in the cash rate will not be met before 2024.”

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