The RBA has lifted the cash rate a further 25 basis points in June, taking the cash rate 400 basis points higher to 4.1%, announcing 12 hikes since April last year.
A mix of outcomes across economic data through the month created another ‘line-ball’ call for the outlook in the cash rate. May saw measures of consumer sentiment trend lower alongside a rise in the unemployment rate, and retail trade was flat in April.
In the way of upside risks for inflation and the cash rate, the April monthly CPI indicator showed an annual lift of 6.8% (though the exclusion of volatile items saw a slowdown in annual growth). The Fair Work Commission decision to increase award wages by 5.75%, and minimum wages by 8.6% next financial year, also coincided with increased market expectations of a lift in the cash rate.
Adding to uncertainty around interest rate decisions is the housing market dichotomy. CoreLogic’s Home Value Index accelerated in May, rising 1.2% nationally and while established home and residential land values do not directly feed into the CPI housing indicator, there may be upside risk to inflation from rising home prices due to potential wealth effects. The minutes of the May board meeting noted rising asset prices had prompted the RBA to revise forecasts for consumption growth a little higher, and the June statement acknowledges house prices are rising again.
Although the monthly rate of growth in the CoreLogic rental index eased in May, rents continued to rise well above historic averages at 0.8%. The CoreLogic rent value index presents a leading indicator for the trajectory of CPI rents, where CoreLogic imputes an estimate of market rent based on listings evidence, while the CPI measures rents actually paid. It suggests that those rolling off fixed-leases may expect a rental increase, adding further upwards pressure to rental inflation.
However, there is weakness in other facets of housing market activity. New dwelling approvals plunged -8.1% in April, to the lowest level since April 2012. A higher interest rate environment is deterring the supply of new housing, which will continue to ease price pressures in the delivery of new dwellings as the construction pipeline slows. Inflation from residential construction costs, which has the largest weighting in the CPI ‘basket’, has reduced substantially over the past year.
In the short term, the June rate rise may take some steam out of the housing market. For the past two decades, there has been a strong negative correlation between movements in the RBA cash rate and the CoreLogic Home Value Index.
However, like many economic trends since the pandemic, the housing market has defied expectations. With continued strong demand from a surge in overseas migration, a slow return to pre-pandemic household size in the capital cities, and persistently low levels of advertised supply, the June rate hike may only serve to take some steam out of the recovery trend in housing values, rather than reverse recent gains.
Meet Eliza Owen
Head of Residential Research Australia
Eliza Owen was appointed the Head of Research at CoreLogic Australia in 2020.
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