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ResidentialAna NarvaezTue 18 Feb 20

Constrained Supply, Low Cash Rate Increases Wealth Inequality: RBA

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Australia’s record low interest rates are exacerbating housing wealth inequality, a new Reserve Bank research paper has found.

The paper, released as the bank’s February minutes suggests that further easing is in the pipeline, shows that expensive areas are more sensitive to changes in the cash rate.

Reserve Bank economists Calvin He and Gianni La Cava said that there is evidence that housing supply conditions are a factor.

“For areas in which it is difficult to build housing—where supply is ‘tight’—most of the increase in demand will be met by an increase in the price of housing, rather than in the quantity of housing,” He and La Cava said.

Housing supply in more expensive areas tend to be more constrained, while the price distribution of detached houses is slightly more sensitive than apartments to changes in the cash rate.

The economists said that in the longer term housing supply should move in line with construction costs, but that in the short-run land availability matters.

While the property market rebound has started to stir a recovery in residential construction, inner-city apartment completions remain 30 per cent below their 2017 peak.

Related: Australia’s Housing System Needs a Big Shake-Up

▲ House prices tend to respond differently to monetary policy in regions where incomes are high, households are more indebted and there is a higher share of investors.


Despite the significance of the downturn, Australia’s housing markets are the most unaffordable in the developed world.

And cheap debt has supercharged house prices, according to UNSW professor Hal Pawson.

After cutting interest rates three times last year, the bank’s minutes reveal that the bar for further easing remains low with members “reviewing the case for further reduction in the cash rate” at its February meeting.

The board noted that a further reduction in the cash rate could encourage more borrowing at a time where there was already a “strong upswing” in the market.

“Contacts in the Bank's business liaison program had reported an increase in sales of new homes and greenfield land in recent months.”

Separately, the board said that the coronavirus outbreak provided a “new source of uncertainty” and “presented a material near-term risk to the economic outlook for China and for international trade flows, and thereby the Australian economy”.

ResidentialAustraliaFinanceReal EstateSector
AUTHOR
Ana Narvaez
The Urban Developer - Editorial Director
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Article originally posted at: https://theurbandeveloper.com/articles/constrained-supply-low-cash-rate-increase-wealth-inequality-rba-