Ray White Group Chief Economist, Nerida Conisbee, said that the RBA’s decision to lift interest rates comes as headline CPI rose to 3.8 per cent in the year to December, moving further away from the target band of 2 to 3 per cent.
“Housing costs are now the largest contributor to CPI inflation, rising by around 5.5 per cent over the year, well above headline inflation,” Ms Conisbee said.
“This category is made up primarily of rents, new dwelling purchase costs and household energy.
“Rents continue to record strong annual growth, while new dwelling costs remain elevated due to high construction and labour costs.”
Ms Conisbee said that these pressures stem from a fundamental housing shortage and weak supply pipeline – problems that interest rate hikes are poorly equipped to address.
“Higher rates do little to address the underlying drivers of housing inflation. They do not reduce planning delays, ease regulatory costs or expand the construction workforce,” she said.
“Instead, higher rates lift financing costs, reduce development feasibility and further discourage new supply. In a market already characterised by chronic undersupply, this risks entrenching housing inflation rather than bringing it under control.”
The rental market provides a clear example of this counterproductive effect.
Following the commencement of the current tightening cycle in May 2022, investor loans fell by 28 per cent within 12 months, while rental inflation accelerated dramatically.
“By May 2024, rents nationally were 18.3 per cent higher, with some cities, including Perth, recording increases close to 30 per cent,” Ms Conisbee said.
She said that government infrastructure spending is exacerbating the problem by competing with residential construction for limited resources.
“Large public infrastructure programs compete directly with residential construction for labour, materials and equipment, drawing capacity away from housing at a time when supply is already constrained,” she said.
“This crowding-out effect pushes up wages and input costs across the building sector, raising the cost of delivering new homes and slowing the pace of construction.”
According to Ms Conisbee, the RBA now faces an increasingly difficult balancing act, as monetary policy can restrain parts of the economy showing resilience but cannot effectively address housing-related inflation.
“Tightening policy may help ensure inflation expectations remain anchored, but it does not meaningfully ease the constraints pushing housing costs higher,” she said.
She also pointed out that government policies aimed at increasing home ownership may be counterproductive from an inflation perspective.
“Generous first home buyer incentives, particularly schemes that allow purchases with deposits as low as 5 per cent, increase the pool of buyers without addressing the underlying shortage of homes,” Ms Conisbee said.
“While these measures improve access to ownership for some households, they also intensify competition and place additional upward pressure on prices in the most supply-constrained segments of the market.”
Ms Conisbee said that house prices, particularly at the more affordable end of the market, are likely to continue rising despite interest rate increases, highlighting the limitations of monetary policy in addressing Australia’s housing-driven inflation.
