Soaring Australian house prices unlikely to prevent further easing, says Capital Economics

Soaring house prices in Australia is not expected to prevent any further monetary policy easing by the Reserve Bank of Australia (RBA), according to the latest research report from Capital Economics.

With bushfires still roaring across large parts of the country, the economic data are naturally taking a backseat. This week we learned that house price growth slowed from 1.9 percent m/m in November to 1.4 percent m/m in December. But that still meant that house prices rose at an annualised pace of nearly 20 percent in Q4, the strongest increase in a decade.

Household income growth remains weak allowing for the impact of the tax cuts. If house prices keep rising by 1 percent m/m as they have since their bottom in June, affordability is estimated to be the poorest since the GFC by mid-2021, the report added.

However, revised figures show that sales haven’t fallen much recently. In fact, CoreLogic’s estimates suggest that sales climbed to a four-year high at the end of 2019. Auction clearance rates have hovered around 70 percent in recent weeks and tell a similar story.

"We now expect house prices to rise by 8 percent this year," Capital Economics commented.

The RBA has been arguing that rising house prices are a welcome part of the transmission mechanism and would only become a concern if they were accompanied by rising household indebtedness.

"As things stand, there are no signs of a renewed boom in housing credit, which expanded by just 2.7 percent y/y in November. And while housing loan commitments have rebounded, they are consistent with credit growth holding broadly steady rather than accelerating. As such, we still expect the RBA to cut rates to 0.25 percent by April," the report further mentioned in its comments.