RBA Governor Expects House Prices to Increase After Interest Rate Hikes End

A 'sold' real estate sign is seen outside a high-rise apartment block in the suburb Kirribilli in Sydney, Australia, on May 8, 2021. Lisa Maree Williams/Getty Images

The governor of the Reserve Bank of Australia (RBA) has predicted that house prices could rise after the bank ends the current interest rate hiking cycle.

Since May 2022, the RBA has embarked on a monetary tightening policy to combat soaring inflation, taking the official cash rate from the historic low of 0.1 percent to the current 4.1 percent.

The sharp rise in interest rates led to a downturn in the property market in 2022, which saw house prices drop for ten consecutive months.

However, the market started to rebound in March, ahead of experts’ expectations.

Interest Rate Perception Causes House Prices to Increase

During a parliamentary hearing on Aug. 11, RBA Governor Philip Lowe, who will finish his term in September, attributed the housing market’s recovery to households’ perception that interest rates were about to peak.

In addition, the governor said the resumption of the flow of immigrants after Australian borders reopened caused housing demand and prices to increase.

“(When there is) a strong demand relative to supply, rents go up, and where rents go up, (property) prices tend to go up,” he said.

Another major contributor to elevated home values was a rise in nominal incomes due to inflation.

Reserve Bank Governor Philip Lowe speaks during the House of Representatives Economics Committee at Parliament House in Canberra, Australia on Feb. 7, 2020. Tracey Nearmy/Getty Images

Mr. Lowe said that while higher interest rates caused difficulties for a portion of the population, many people also benefited from it, noting that he had received letters thanking him for lifting the cash rate.

“For many years, I got letters from people bemoaning the low level of interest rates,” he said.

“They’re relying on interest income, and the interest rate was zero, so they weren’t getting an income. And now they’re getting more income.”

As people were able to earn more, the governor said they would likely to enter the property market when there was an expectation of a strong demand for housing.

“So people are saying, ‘Well, if I can afford the current rate of repayments, and as long as I keep my job, there’s going to be strong demand for housing going forward, and it’s a good time to buy property’,” Mr. Lowe said.

Nevertheless, the governor noted that housing demand could change in the coming period due to many factors, including an anticipated rise in unemployment caused by economic slowdowns and a drop in nominal income growth.

RBA Governor Says Rent Freeze Won’t Work

As Mr. Lowe elaborated on how an end to interest rate hikes could impact home prices, he rejected the idea of imposing rent control to stabilise the housing market.

Australia has seen a sharp growth in rental prices in the past couple of years due to record-low vacancies and supply.

According to real estate data provider CoreLogic, the average annual rental growth soared from 1.44 percent in March 2020–before the COVID-19 pandemic, to 9.67 percent in June 2023.

The national median rent stood at $589 (US$396) per week as of June 30, up 9.7 percent compared to the previous 12 months.

The Australian Greens Party and social housing advocacy groups have been calling on the government to implement a national rent freeze to tackle high rental prices.

However, the RBA governor said such a policy would reduce incentives for investors to increase rental supply in most cases.

“It might help in the short run, it might relieve some pressure on people in the short run, and clearly that’s the case,” he said.

“But we’ve got to keep a medium-term perspective on this–will it add to the supply of rental accommodation over time? My judgment would be that it would not.”

Mr. Lowe suggested the government take a long-term focus on alleviating pressures on the housing market by conducting planning and zoning reforms to boost market supply.

“Generally, giving people more money or capping prices doesn’t help with the balance of supply and demand in the market,” he said.