Pricier Property Markets Most Sensitive to Rates, RBA Paper Says

Michael Heath

(Bloomberg) -- Australian monetary policy adjustments have the greatest impact on expensive property markets, a Reserve Bank research paper showed, and low interest rates can temporarily exacerbate housing wealth inequality.

“Prices are typically more sensitive to changes in interest rates in areas where land is more expensive,” RBA economists Calvin He and Gianni La Cava said in the paper Monday. “Specifically, we find the sensitivity is greater in areas where incomes are relatively high, households are more indebted and there are more investors.”

Australia’s central bank cuts its cash rate three times last year to a record-low 0.75% as it sought to spur economic growth and hiring. That helped reignite property prices, with Sydney and Melbourne leading the way, and climbing 1.1% and 1.2%, respectively, in the month of January.

The RBA paper found that housing prices respond differently to monetary policy depending on local housing supply conditions, investor concentration and average income and mortgage debt.

“This speaks to the underlying transmission of monetary policy and suggests that the effectiveness of monetary policy through the housing market is dependent on the state of the economy,” it said.

RBA chief Philip Lowe has said a stronger property market will begin to encourage a recovery in residential construction, helping to boost the economy. It should also, he says, lead to households feeling wealthier and more inclined to spend.

Consumption accounts for around 55% of gross domestic product and has been in the doldrums while households grapple with low wage growth and high debt.

“We find that housing prices in more expensive areas are more sensitive to changes in interest rates than in cheaper areas,” the economists said. “This suggests that lower interest rates increase housing wealth inequality, while higher rates do the opposite. However, these effects appear to be temporary.”

Traders are pricing in little chance of a rate cut at the RBA’s next two meetings, with bets rising above 50% in July.

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To contact the editors responsible for this story: Paul Jackson at, Alexandra Veroude, Jason Clenfield

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