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Reserve Bank insiders are tipping Labor’s tax reforms and the decline in consumer sentiment might dampen house prices and spending, inadvertently lowering the prospect of more interest rate rises after years of claims that government policies were pushing up inflation.
Sources familiar with thinking inside the RBA and former monetary policy officials said an unintended consequence of a projected drop-off in values would be a slowdown in spending by home owners who feel less rich.
The reduction in buying and selling, which Westpac predicts could decline by 20 per cent, will reduce spending on removalists, conveyancers, furniture and other items attached to property purchases.
Former Reserve Bank board member Warwick McKibbin said that Labor’s tax overhaul could be “inadvertently helpful” to the fight against inflation, but “hopefully, that’s not the government’s intended policy”.
“It could be a side-effect. If you slow down the economy, that could take the heat out of inflation,” he said. “But if you are truly worried about inflation, you should raise productivity, which ensures everyone gains and also pushes down inflation.”
On Tuesday, Treasurer Jim Chalmers emphasised the social benefit of more affordable homes and giving first home buyers a chance against investors. The Coalition is preparing to vote against negative gearing and capital gains changes, which the Albanese government will rush through parliament after a rapid two-day inquiry that has been criticised by teal MPs and business groups.
Labor is balancing the instinct to speak positively about cheaper homes for young people with the need to remain sensitive to the many Australians who derive their wealth from housing. Some analysts predict prices could dip further than the government’s 2 per cent estimate.
A source with knowledge of the RBA’s thinking said officials were considering the property downturn before a June 16 interest rate decision and this factor would become more salient if prices and consumer sentiment dropped more than expected.
“It won’t be everything, but it’ll be something,” the source said, noting that three consecutive interest rate rises this year were a key factor in lower prices.
Consumer confidence has nose-dived over the past three months. The ANZ-Roy Morgan weekly measure of consumer sentiment, released Tuesday, showed a slight improvement over the past seven days, but it remains lower than during the depths of the 2020 pandemic lockdowns.
Chalmers pushed back on concerns that users of the government’s 5 per cent deposit scheme could dip into negative equity, as the government banks on non-asset owners backing its contentious budget in the face of loud complaints from investors.
“Housing’s a long‑term investment, and you don’t make decisions about housing based on short‑term fluctuations in prices or even in auction clearance rates,” Chalmers told reporters after facing accusations of lying about the tax changes on breakfast television.
“For too long in this country, first home buyers have been rocking up to auctions and being beaten out by people who have already got five or 10 or 15 established homes.
“The difficult, decisive steps that we are taking in the budget, politically contentious as they might be, are all about making it easier for first home buyers.”
Shadow treasurer Tim Wilson said Chalmers had been “playing interest rate ‘chicken’ with the Reserve Bank by stoking inflation and forcing up interest rates” via high levels of spending.
“Households are now doing it so tough, so ‘Pyro Jim’ has switched to crashing the economy through higher taxes in the hope it’ll stop even higher interest rates,” Wilson said.
Figures from property data firm Cotality released on Monday showed that Sydney values fell by 0.9 per cent in May to be down by 2.1 per cent over the past three months. In Melbourne, total dwelling values slipped another 0.8 per cent to be down by 2.3 per cent during the quarter. Prices grew in other cities.
Financial markets believe there’s virtually no chance the RBA will lift rates at its meeting this month, with a 44 per cent chance of a hike in August.
Independent economist Saul Eslake said his view was that the drop in prices was mostly caused by past rate rises, not the anti-investment mood created by Labor’s policies. He said that lower house prices were a good thing, and that the government would be wise to resist any calls to protect asset prices and reverse course.
“If we were talking about the falling price of any of the other elements of inflation, we’d be celebrating it and Chalmers would be taking credit for it,” he said, saying the debate illustrated the difficulty of pursuing pro-affordability policies when Australians were so tied to asset wealth.
Westpac chief economist and former RBA senior official Luci Ellis said the Reserve would not be unhappy with the fallout from the government’s budget.
During her time at the Reserve, Ellis had noted that the CGT concession had encouraged investors to buy into the housing market. “From a financial stability perspective, the Reserve Bank would not be sad that leveraged property investment is now less concessionally taxed compared to income-producing investments,” she said.
Jonathan Kearns, a former bank official and now chief economist at Challenger, said there was a chance the drop-off in prices could be larger than the 2 per cent forecast by the Treasury, noting that the tax changes came at a time when prices were already falling.
Kearns said that spending by consumers was “quite sensitive” to house prices, but said that it would take a large drop in prices to materially affect the bank’s decision-making.
He added there was a large and growing gap between the RBA and the government’s forecasts for housing construction. The tax hikes could slow house building even more, he said, offsetting any reduction in prices.
Interest rate settings work through the economy in four different ways. The most obvious to borrowers is through their repayments.
Rates also operate through the so-called “wealth effect”. If the prices of assets such as housing increase because of a cut in interest rates, consumers and businesses are more likely to increase spending.
RBA governor Michele Bullock, asked specifically about the wealth effect late last year, noted it did factor into the RBA’s own forecasts for household consumption and general economic activity.
“The evidence is that wealth does affect consumption. Wealth comes from a number of things, certainly it comes from housing prices,” she said at a press conference in September.
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