In tough times, government and RBA walk a tightrope

The Federal Budget has been handed down and the economic picture it paints is not pretty. Times are tough and there are tougher times ahead.

Housing is cited as one of the key industries contributing to high inflation. Though the CPI figure was the highest in decades, the cost of housing – rent, building materials and the like – actually outpaced inflation.

Yet house prices are on the decline. Rather unhelpfully, the Reserve Bank of Australia’s (RBA) apparently “secret” modelling was made public recently, revealing a scenario in which house prices could fall by as much as 20 per cent from the peak by the end of 2024.

Just because house prices are trending down, it doesn’t mean they are more affordable by default. Borrowing costs have risen sharply and in terms of the availability of homes for people to buy, right now there’s a deficit. Supply is far from meeting demand.

The national Housing Accord, which aims to build a million homes over five years from 2024, is a welcome supply-side initiative which, in New South Wales especially, is needed.

But we also need the details so the development community can mobilise, local planning authorities can absorb what’s now expected of them, and the Government’s well-received vision can materialise into reality. The market – that is, people – have waited long enough for a proper measure to address affordability.

While on the surface, one million new dwellings sounds significant, how many would have been built anyway? Does this accord represent a substantial increase in supply above and beyond what would otherwise have been delivered?

Diverging paths

In real estate, we’re seeing two markets emerge. The conditions for investors and owner-occupiers are charting different courses.

For owner-occupiers, the value of their main asset is trending down. The cost of servicing their mortgage is going up.

For investors, the price of property is more affordable than it was six months ago and rents are trending higher.

Plus, for the foreseeable future, demand will continue to outstrip supply. The cost of living is going up. Which brings us to interest rates.

Given the delicacy of the economic situation, the deepening impact of climate disasters and the promise of skyrocketing energy prices, this month’s rate rise will compound the pain being experienced by mortgage holders.

You could argue the Reserve Bank had no choice but to raise rates. It has limited tools at its disposal to curb inflation and further rises could follow, given the higher-than-expected CPI figure.

The job of Government and bodies like the RBA is to proactively steer the economy in a way that avoids the need for radical manoeuvres that dish out pain to the community with no time to adjust. Regrettably, this is what mortgage holders in particular are currently dealing with.

The Reserve Bank should back off the rate rise cycle and give people the opportunity to navigate the turbulence. Those people who can’t pay their mortgage are unlikely to celebrate a fix to the inflation problem.