Australia's Housing Downturn Meets a RBA That Won't Ride to the Rescue

Australia's housing market is sliding, yet the central bank that once cushioned such declines is now tightening policy instead. The Reserve Bank of Australia is widely expected to raise interest rates for a fourth time next Tuesday, lifting the cash rate to a 15-year high of 4.6%, according to market participants and economists surveyed by wire services.

For decades, falling house prices prompted rate cuts to support demand and household spending. That pattern has broken. National prices are down nearly 4% from their peaks, and a growing number of economists expect a peak-to-trough decline of about 10% this cycle — the largest in three decades. HSBC forecasts a 13% drop if rates rise twice more. A government tax change on investment properties has further hobbled investor lending.

Yet the RBA appears unmoved. Governor Michele Bullock said this week that the bank is entering "a new world," contrasting today's environment with an era of open trade and low inflation when managing demand was the primary task. "These shocks to the supply side of the economy are very difficult for monetary policy to deal with," she said.

Those supply pressures are multiplying. An overseas war has pushed oil prices back above $100 a barrel, threatening broader price pressures. A global investment boom in data centres is adding to domestic demand, and government spending on defence and healthcare looks set to stay elevated, lifting longer-term borrowing costs worldwide. Deputy Governor Andrew Hauser recently returned from the US more concerned about costs after seeing the AI-driven investment frenzy firsthand.

Assistant Governor Sarah Hunter has played down the link between falling house prices and household spending, suggesting a sustained 10% decline would be needed to have a substantial impact. "So no recovery in house prices over a one- to two-year horizon," she said. "That, at least in historical context, would be quite surprising to see."

The labour market's unusual resilience is also blunting the slowdown's bite. Incomes are holding up well enough that many households still have spare cash — enough to splurge on electric vehicles even as oil prices surge. Commonwealth Bank chief economist Luke Yeaman said keeping inflation contained will require higher rates than in the past, meaning "the slowing economy will not bring much in the way of immediate or major rate relief for Australian households."

Much of what is driving activity this year — the data centre boom, fiscal spending and immigration — is insensitive to interest rates, unlike before the pandemic when households did most of the work, said Lachlan Dynan, macro strategist at Deutsche Bank. That leaves housing to absorb what the rest of the economy will not. "You can be bearish on the housing market and still think the RBA is going to hike," he said. "In order to bring the aggregate economy into balance, maybe you need a larger housing downturn than otherwise."

Markets have taken the hint. Traders are fully pricing a further rise to 4.85%, with a 70% chance of rates reaching 5.1%. The RBA has already raised rates three times this year, taking the cash rate back to its post-pandemic high of 4.35%, enough to bring inflation down from a 7.8% peak. Heading into next week's meeting, policymakers are debating whether that has been sufficient. The housing market suggests tightening is biting — but for the RBA, it may not be biting enough.