Media Release | 2 May 2023
Commentary from The Agency's Managing Director and Group CEO Geoff Lucas on the RBA's May interest rate decision
The Agency Group CEO Geoff Lucas said the RBA decision to increase interest rates by 25 basis points was necessary because despite the recent reductions in the inflation rate, it continues to sit well outside the RBA’s target.
"We have had a second month of very strong housing data and in particular a resurgence in Sydney property prices which I believe has weighed heavily on the RBA board," Mr Lucas said.
"The pause in interest rate increases last month created dramatically improved sentiment amongst buyers who believe that the current tightening cycle is over or coming to an end. This has been exacerbated by decade low volumes of listings.
While it may not be a broadly popular decision it was a vital one for the board to make this month. When you look at “real interest rates”, inflation minus interest rates, we were actually sitting at negative 3 per cent. This shows there was still more work for the RBA to do especially as we are well below the real interest rates of our ‘dollar bloc’ countries including the US, Canada, New Zealand and the UK. A continued divergence between Australia and its dollar linked international countries results in downward currency pressure and further risk of ‘imported inflation’. In other words, keeping rates relatively low, causes greater inflation. Despite very much the lucky country now and well into the foreseeable future, we are inextricably linked to international economic forces.
Another pressure which is currently affecting property prices and rental affordability is the chronic undersupply of homes. This is largely due to the cost of construction and issues around supply chains post COVID. This has been exacerbated by record immigration. At the last budget in October the forecast for immigration was 235,000 immigrants. At the moment we are tracking over 400,000 for the twelve month period – that is a 70% variance in just six months ! While we are obsessed with assessing solutions to address the supply shortage, I think it is time to assess how we can also manage demand. Whilst a growing population is economically desirable in the long term for Australia’s future prosperity and growth, by narrowing the inflow to specific beneficial skills of immigrants, we can both alleviate the excess demand as well as adding much needed skills to our workforce and population. Whilst high levels of skilled immigrants are beneficial, it should be economically viable for the immigrants – and we currently lack the infrastructure and certainly housing to accommodate these record levels. Perhaps a 2 year limit of 250,000 (reducing demand by 150,000 per annum) would achieve both, whilst we use the two year hiatus to address supply.
Unfortunately this increase is the increase we had to have, and whilst unpopular with borrowers, it hopefully deflates to some extent any irrational exuberance. The RBA is correct in keeping its foot firmly on the throat of a slowly reducing inflation rate. Consumers should not lose sight of the fact that we are either at or very close to the end of this tightening cycle, and an environment of less volatility in home prices.
The Agency Group CEO Geoff Lucas.