How Housing Values Influence Inflation

In October, the Reserve Bank of Australia (RBA) decided to maintain the cash rate at 4.1% for the fourth consecutive month.

They justified this decision by pointing to a more balanced supply and demand in the economy but expressed concerns about inflation and economic uncertainty.

Despite a recent increase in inflation from 4.9% in July to 5.5% in August, the RBA chose not to raise interest rates. The annual growth in the Consumer Price Index (CPI), adjusted for volatility, decreased to 5.3%. However, inflation remains a significant concern for the RBA due to rising fuel and energy prices, persistent service and rental inflation, potentially leading to future rate hikes. The RBA is closely monitoring September's inflation data ahead of its November meeting.

The RBA is also watching the housing sector closely, particularly rental pressures, though the annual change in market rents has been slowing. While the RBA doesn't directly target asset prices, the recent slowdown in Australian housing value growth could be a concern. Higher housing values can sustain inflation through the wealth effect, encouraging homeowners to spend more.

Despite four months of unchanged rates, consumer sentiment remains pessimistic, with households facing cost-of-living pressures and the possibility of rate hikes. Residential purchasing activity is unlikely to improve significantly until economic certainty is restored.

Source: https://www.corelogic.com.au/news-research/news/2023/rba-holds-cash-rate-steady-but-warns-on-inflation