House Prices Tumble: Surprise Reprieve for RBA Hike

The Reserve Bank of Australia (RBA) may be surprised by falling house prices, which could deliver a reprieve from further interest rate hikes. Housing was identified as Australia's chronic inflation issue, accounting for nearly one-third of annual inflation despite only making up 21% of the Consumer Price Index (CPI) basket. AMP economists My Bui and Diana Mousina pointed out that new dwelling purchases need to come down to at least 0.25% month-on-month for the RBA to be comfortable, as this is a very cyclical category.

RBA governor Michele Bullock singled out the construction sector as one area where cost pressures were flowing through from the Middle East to consumers, with producer prices rising for things like building costs. The 2.1% rise in house construction input costs in the June quarter was the largest quarterly increase since 2022, according to JP Morgan analyst Tom Ryan.

However, cost pressures remain below the 2021/22 inflation breakout, and the slowdown in the established housing market should cap capacity use in the construction sector and limit how much builders can pass on costs. HSBC chief economist Paul Bloxham expects the RBA to be concerned that inflation is too high, but mindful of weak growth and falling house prices putting downward pressure on inflation.

A weak GDP print next week or a sharper-than-expected decline in housing prices could tip the RBA back away from another hike. While Michele Bullock has consistently reminded reporters that the bank does not target house prices, a deep downturn could dent demand and do part of the RBA's job.