Australian Home Prices and Interest Rates

Tuesday, April 21, 2015

Key points: A housing recovery has been a necessary aspect of rebalancing the economy through the mining bust. While Australian property prices are overvalued, this should not be a constraint on the RBA. Expect another rate cut in May with the possibility of more to follow. The medium term return outlook for residential property is likely to be constrained.

The case for the RBA resuming interest rate cuts this year has been fairly clear: commodity prices have fallen more than expected; the $A has remained relatively high; while residential construction and consumer spending are okay the outlook for business investment has deteriorated pointing to overall growth remaining sub-par; and inflation is low. This has seen the cash rate fall to 2.25%. While the RBA left rates on hold at its April meeting, it retains an easing bias pointing to further cuts ahead.