By Stella Qiu
SYDNEY, Sept 24 (Reuters) - For decades, whenever house prices in Australia fell, the central bank rode to the rescue with rate cuts to shore up economic demand and keep households spending.
House prices are falling once again, but this time the central bank is raising rates, potentially subjecting the housing market to its worst downturn in a generation.
The Reserve Bank of Australia is expected to lift interest rates for a fourth time next Tuesday to a 15-year high of 4.6%, according
to market participants and nearly all of the economists polled by Reuters.
An overseas war is complicating the near-term inflation outlook, a global investment boom in data centres is adding to domestic demand for goods and services and government spending on defence and healthcare appears set to stay elevated, lifting longer-term borrowing costs worldwide, economists say.
"I think we're moving into a new world," Reserve Bank of Australia Governor Michele Bullock said on Tuesday, contrasting the situation with an era of free and open trade and low inflation, when the bank's job was to manage demand.
"These shocks to the supply side of the economy are very difficult for monetary policy to deal with."
As a result, inflation will stay high for longer than a typical downturn would suggest, meaning falling housing prices will not be sufficient on their own to push the RBA to cut rates.
While many Australians are struggling financially, an unusually resilient labour market is supporting incomes, leaving households with enough spare cash to splurge on electric vehicles as oil prices surge.
Keeping inflation contained will require higher rates than in the past, said Luke Yeaman, chief economist at the Commonwealth Bank of Australia, which expects a hike next week.
"This means the slowing economy will not bring much in the way of immediate or major rate relief for Australian households," he said.
NOT ENOUGH TO MOVE RBA
The RBA has raised interest rates three times this year, taking the cash rate back to its post-pandemic high of 4.35%, which was enough to bring inflation down from a 7.8% peak. Yet heading into next week's meeting, policymakers are debating a critical question: have they done enough this time?
The housing market suggests tightening is already biting, with national prices down nearly 4% from their peaks, a fall compounded by a government tax change on investment properties that has hobbled investor lending.
More economists are tipping a peak-to-trough fall of 10% for housing prices in this cycle, the biggest in three decades. HSBC forecasts 13% if rates rise twice more.
For policymakers, that might still not be enough. Sarah Hunter, an assistant RBA governor, played down the link between falling house prices and household spending. Earlier this month, she said house prices would need to fall by 10% on a sustained basis to have a substantial impact on household spending.
"So no recovery in house prices over a one- to two-year horizon," she said. "That, at least in historical context, would be quite surprising to see."
Markets have taken the hint. Traders are fully pricing a further rise to 4.85%, with a 70% chance of rates reaching 5.1%.
WARS AND DATA CENTRES
When the RBA held policy steady for a second meeting in August, it singled out the US-Israeli war on Iran and the data centre boom as key inflation risks.
Oil prices are back above $100 a barrel, threatening to feed through into broader price pressures, while RBA Deputy Governor Andrew Hauser recently returned from the US more worried about costs after having seen the AI-driven investment frenzy firsthand.
Much of what is driving activity this year - the data centre boom, fiscal spending and immigration - is not sensitive to interest rates, unlike before the pandemic when households did most of the work, said Lachlan Dynan, macro strategist at Deutsche Bank.
That leaves housing to absorb what the rest of the economy will not.
"You can be bearish on the housing market and still think the RBA is going to hike," Dynan said. "In order to bring the aggregate economy into balance, maybe you need a larger housing downturn than otherwise."
(Reporting by Stella Qiu; Editing by Thomas Derpinghaus)
