Hot housing markets in Australia and New Zealand could derail further rate cuts

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House prices in Australia and New Zealand are rising quickly again after a slowdown in the rate of price appreciation in 2015.

That increase in prices will make the RBA and RBNZ reluctant cutters according to Paul Dales, Capital Economics’ chief economist for Australia and New Zealand.

In his latest weekly outlook for the region Dales said, “with both the RBA and RBNZ updating their references to housing in their latest policy statements, it is clear that the recent resurgence in the housing markets in Australia and New Zealand are creating a lot of debate within the central banks”.

He said that “if the housing markets remained strong or continued to strengthen, then the Banks would become less inclined to cut interest rates further”. That means his expectation that rates would be cut to 1% in Australia and 1.75% in new Zealand “would look out of reach”.

Dales says the May rise in prices for Australian housing was “blistering” and after adjusting for seasonal swings, prices “leapt by 3.8% m/m. That’s the biggest monthly rise in the past 20 years” (our emphasis).

That’s a problem for the RBA and similar moves in New Zealand are causing trouble for the RBNZ across the Tasman. He says the price rises may have played a role in keeping rates at 1.75% and 2.25% at their respective meetings this month.

“In their policy statements the RBA said that ‘dwelling prices have begun to rise again recently’ and the RBNZ went one step further by noting that ‘house price inflation in Auckland and other regions is adding to financial stability concerns’,” he said.

It’s up to regulators, APRA in Australia and the RBNZ itself in New Zealand, to restrain prices, Dales says. But he adds that the momentum of the market in Australia suggests the market is already slowing.

“Forward-looking indicators have been less upbeat. The auction clearance rate usually does a good job of showing where house price inflation is going to go over the next six months,” he said.

He says home loan lending also suggests further moderation in house growth. But, the major banks’ stock prices have been under pressure for the past two trading sessions after yesterday’s news that the Commonwealth Bank is going to lower the rate of interest on investment loans.

That has raised fears of the reignition of a mortgage war in Australia.

It may also derail Dales’ thesis that the house price rise in Australia will slow. In New Zealand, Dales says the house market has more momentum.

Though Dales clearly believes rates will be again cut in both nations, the uptick in the rate of housing price appreciation suggests it’s going to be a big task for the RBA and RBNZ to cut rates again any time soon.

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