RBA Gets Unlikely Ally in Fight Against Inflation: Slowing Housing Market

The Reserve Bank of Australia (RBA) has received an unexpected helping hand in its fight against inflation, thanks to a nationwide slowdown in housing prices. The RBA's three interest rate hikes in February, March, and May were aimed at cooling the economy, but governor Michele Bullock will not admit that the bank targets asset prices.

The so-called wealth effect works both ways: climbing house prices make people feel wealthier and more likely to spend, while falling property values have the opposite effect. The RBA's rate hikes had already started to slow down housing markets in Sydney and other cities by March and April, but it was the May budget that amplified these effects.

Treasurer Jim Chalmers' changes to negative gearing and capital gains tax were not on the Reserve Bank's radar when it started raising interest rates in February. The government's policies have contributed to a nationwide slowdown in prices and auction activity, leading to lower demand for related goods and services.

Last week's inflation figures revealed deep falls in prices for goods associated with the housing sector, including furniture (down 4.6% in Sydney), household textiles (down 2.1%), and glassware and tableware (down 5.5%). The stronger Australian dollar is also pushing down the price of imported goods.

While the government will not admit that its policies were aimed at cutting property prices, the interaction of tighter monetary policy and fewer tax incentives for investors in the property market is clearly helping to reduce inflation. Sydney's median house value remains above $1.5 million, but the national dwelling value has dropped back to where it was in March.