Record housing wealth. Watchful Reserve Bank
RBA Board Minutes; Residential Property Price Indexes

Record home values: The total value of Australia’s 10.6 million dwellings was a record $7,724.4 billion in the December quarter with the average (mean) dwelling price at $728,500. Home prices rose in all capital cities in the quarter and over the year.

Reserve Bank Board meeting minutes: At the March 2, 2021 Board meeting Reserve Bank policymakers reiterated that the cash rate will remain at 0.10 per cent (10 basis points) “for as long as necessary”.

Home price data is important for retailers, especially those focussed on consumer durables. The Reserve Bank Board minutes are important in gauging policy settings.

What does it all mean?

• The Reserve Bank Governor has been active on the speaking circuit over the past month. So there is little new to be gleaned from the minutes of the Board meeting held a fortnight ago. Cash rates are unlikely to rise for three years. And the 3-year bond yield target will remain: “The Board agreed that it would not consider removing the target completely or changing the target yield of 10 basis points”.

• The latest CoreLogic home value index covers the period up to end-February. So the latest home price data from the Bureau of Statistics is ancient history. The key value of the data is putting values on housing wealth – clearly at record highs in response to solid price gains. Higher housing wealth improves the purchasing power of home owners and boosts consumer confidence. Both results are positive for consumer spending.

• The Reserve Bank is watching lending standards quite carefully to ensure that higher home prices wasn’t causing any irrational exuberance. Lending standards are considered “sound” at present.

What do you need to know?

Minutes of the Reserve Bank Board meeting held on March 2, 2021
Last paragraph: “Members affirmed that the cash rate would be maintained at 10 basis points for as long as necessary. They continued to view a negative policy rate as extraordinarily unlikely. The Board will not increase the cash rate until actual inflation is sustainably within the 2 to 3 per cent target range. For this to occur, wages growth would need to be materially higher than it is currently. This would require significant gains in employment and a return to a tight labour market. The Board does not expect these conditions to be met until 2024 at the earliest.”

• On the implications of super-low interest rates: “Members also discussed the effect that low interest rates have on financial and macroeconomic stability. They acknowledged the risks inherent in investors searching for yield in a low interest rate environment, including risks linked to higher leverage and asset prices, particularly in the housing market. Members noted that lending standards remained sound and that it was important that they remain so in an environment of rising housing prices and low interest rates. The Board concluded that there were greater benefits for financial stability from a stronger economy, while acknowledging the importance of closely monitoring risks in asset markets.

• On the 3-year bond target: “The Board agreed that it would not consider removing the target completely or changing the target yield of 10 basis points. If the Board were to maintain the April 2024 bond as the target bond, rather than move to the next bond, the maturity of the target would gradually decline until the bond finally matured in April 2024. In considering this issue, members would give close attention to the flow of economic data and the outlook for inflation and employment.”

Residential property prices – December quarter

• The Australian Bureau of Statistics (ABS) has released its Residential Property Price indexes for the September quarter.

• The Bureau of Statistics reports that Australian home prices rose by 3.0 per cent in the December quarter to stand 3.6 per cent higher over the year. The total value of Australia’s 10.6 million dwellings was a record $7,724.4 billion with the average dwelling price at $728,500.

• In the December quarter, capital city residential property price indexes were: Sydney (up 3.0 per cent); Melbourne (up 3.4 per cent); Brisbane (up 2.7 per cent); Adelaide (up 2.6 per cent); Perth (up 2.9 per cent); Hobart (up 3.1 per cent); Darwin (up 2.2 per cent); Canberra (up 3.4 per cent).

• Over the year to December, residential property prices were: Sydney (up 3.7 per cent); Melbourne (up 2.9 per cent); Brisbane (up 4.0 per cent); Adelaide (up 3.8 per cent); Perth (up 4.2 per cent); Hobart (up 6.4 per cent); Darwin (up 2.3 per cent); Canberra (up 5.2 per cent).

• The total value of residential dwellings in Australia rose $257.9 billion to $7,724.4b this quarter. The mean price of residential dwellings rose $21,300 to $728,500. The number of residential dwellings rose by 44,100 to 10,602,700.

• CommSec estimates that the number of people per home eased from around 2.437 in the September quarter to 2.427 in the December quarter.

• The mean value of all dwellings in in the September quarter: NSW ($939,700, up 6.3 per cent on the year); Victoria ($785,000, up 4.8 per cent); Queensland ($556,500, up 6.9 per cent); South Australia $495,00, up 5.2 per cent); Western Australia ($538,400, up 7.8 per cent); Tasmania ($475,600, up 7.1 per cent); Northern Territory ($429,400, up 4.2 per cent); and the ACT ($757,000, up 7.1 per cent).

• Over the past year the number of homes grew by 161,300 or 1.5 per cent, the slowest annual gain in 6½ years.

What is the importance of the economic data?

• The Reserve Bank releases minutes of its monthly Board meeting a fortnight after the event. The minutes give a guide to Reserve Bank thinking on interest rate settings.

• The Australian Bureau of Statistics (ABS) provides quarterly data on residential prices. The figures provide further perspectives on the state of the housing purchase sector.

What are the implications for investors?

• Interest rates will remain super-low for a number of years. As a consequence, home prices are likely to keep rising – especially if employment continues to recover and job security remains strong. But much will depend on the re-opening of the foreign borders. If the borders stay shut until 2022 then home price growth should ease. After 8 per cent growth in 2021, CBA group economists tip 6 per cent growth in 2022.

• In 2021, population growth is expected to ease to a century low of 0.2 per cent. Meanwhile 130,000 free-standing homes are expected to be built this calendar year.

• The number of homes continues to outstrip the number of people in Australia. As a result there are fewer people in each home. This trend should restrain home building but in these Covid times, everyone is wanting a little more space. Bigger free-standing homes are in demand rather than smaller apartments – influencing demand for raw materials and consumer durables.

Published by Craig James, Chief Economist, CommSec