RBA warns of excess demand as Ekam Capital predicts falling house price growth and high rates
By
Investment manager Ekam Capital expects weakness in house prices to emerge in the second half of 2024, particularly in Sydney and Melbourne, as the Reserve Bank of Australia (RBA) warns of excess demand in the economy and keeps interest rates on hold until the end of the year due to sticky inflation.
Robert Baharian, co-founder and director of Ekam Capital, expects the RBA to maintain current interest rates for now, with the housing market slowing down, especially in the eastern states of Australia, as credit costs continue to rise and the average mortgage size in NSW reaches $744,000, well above Victoria’s $590,500 and the Australian average of $608,000 in March 2024.
“We think interest rates could remain on hold this year given that inflation in Australia remains sticky, especially services inflation, as the RBA pointed out this week. Unemployment remains very low and that is keeping Australians spending. The relatively high level of interest rates could cap growth in house prices, especially in NSW and Victoria,” Mr Baharian said.
He also noted that slowing share market gains in recent weeks suggest that property prices may have peaked in the short term, with house price growth expected to slow.
Mr Baharian highlighted the strong correlation between house prices and housing finance commitments, with housing finance typically leading house prices by about six months. “Home lending growth has slowed and we expect house price growth to do the same. With inflation where it is today, and interest rates at current levels, it could put a lid on how much people can borrow and therefore pull down mortgage growth,” he said.
“It’s hard to see the Reserve Bank of Australia cutting interest rates this year, especially with unemployment so low and services inflation remaining high. People are still spending, so inflation could remain above the reserve banks 2% to 3% target band for the remainder of the year,” Mr Baharian added.
He expects services inflation to remain stubbornly above the central bank’s target band, as Australians fund their consumption out of wages and household savings, pushing up the cost of services such as travel, leisure activities, and eating out.
==
==
While both the unemployment and underemployment rates have been rising slowly, they continue to remain historically low, which may keep inflation stickier for longer.