Housing crash makes thing interesting for RBA.
The RBA held rates steady — but the data it officially watches may be hiding the clearest sign of whether its hikes are working.
The RBA held the cash rate at 4.35% this week, watching a housing market that is clearly cracking under the pressure of three rate rises delivered since the start of the year. Sydney and Melbourne prices are falling. Mortgage applications are down 20% since May. The board knows the hikes are working. What it cannot easily know is whether they are working too well, and that uncertainty is the whole game right now.
The RBA's inflation gauge misses the channel where rate rises hit hardest
There is a measurement problem sitting underneath all of this that deserves more attention than it gets. The RBA's preferred inflation gauge, the trimmed mean, includes new dwelling construction costs but excludes the price of existing homes. That is not an oversight; it is a deliberate methodological choice, based on the logic that a house is an investment asset rather than a consumption good. But it creates a strange situation. When falling house prices start making homeowners feel poorer and pulling back their spending, that wealth effect filters into the economy and eventually into inflation. The RBA is watching it happen, flagging that "momentum in the housing market has shifted," but the direct price signal is not inside the number the board officially targets. As we have reported before, this structural blind spot has long-run consequences, and right now it means the RBA is calibrating monetary policy using a gauge that misses one of the clearest transmission signals available.
It is a bit like monitoring a fever by reading the thermometer under the arm that's not inflamed.
The broader picture is a classic late-cycle dilemma. Underlying inflation is expected to stay above 3% until mid-2027, which is not a number the board can comfortably ignore. Governor Michele Bullock said plainly that the board will raise rates further "if that is what is required." Financial markets are pricing in a 63% chance of another hike by December. At the same time, GDP growth is expected to fall to 1.4% by year's end, the labour market is softening at the edges, and the three hikes already in the system have not finished flowing through household budgets. Rate changes operate on roughly a 12 to 18 month lag; the full weight of this year's increases has not yet landed.
Holding is not the same as declaring victory
That lag is the crux of it. The RBA is not really deciding whether to respond to the economy as it is today. It is deciding whether the economy as it will be in six months, after current hikes have fully fed through, will still need more tightening. That is a genuinely hard call, and holding is a reasonable answer to it. Pausing to observe is not the same as declaring victory.
What makes this cycle particularly awkward is that the housing sector is doing the RBA's work faster than any other part of the economy, yet it is also the sector the bank's formal inflation framework sees least clearly. Construction costs, which do appear in the trimmed mean, have been elevated by supply chain pressures and labour shortages that rate rises can barely touch. The existing home price channel, which the RBA cannot formally count, is where the transmission is most visible and most rapid. It is a bit like monitoring a fever by reading the thermometer under the arm that's not inflamed.
An oil shock could make the hold decision look premature
There is also an oil risk that could cut against the hold. The source article notes that elevated fuel costs from the Middle East conflict are pushing up transport and petrol prices, and those costs feed into almost everything else eventually. If oil stays high, the inflation forecast deteriorates, and the case for another rise strengthens regardless of what the housing market is doing.
The RBA's rate decision-making has never been as mechanically rule-bound as the public debate implies, and this week is a good illustration. The board is not running a formula. It is making a judgement call in a situation where the data it formally watches and the data that is most informative are not the same data. For now, it has chosen to wait and see whether the cooling in housing spreads into the broader economy on its own. That is a defensible read. But with inflation still well above target and markets still pricing in another hike, the pause is not a pivot. It is just a pause.
Sources
The Bearing — The RBA's housing blind spot is about to cost Australia
The Bearing — Rate Rise Decision Making: Does the RBA Watch The Wrong Thing?
Frequently Asked Questions
Why did the RBA hold interest rates instead of raising them again?
The RBA held at 4.35% because the three rate rises already delivered this year have not fully worked through household budgets — rate changes take 12 to 18 months to have their full effect. Holding allows the board to see whether existing tightening is sufficient before adding more.
Why don't falling house prices help bring inflation down in Australia?
The RBA's preferred inflation measure, the trimmed mean, includes the cost of building new homes but deliberately excludes the price of existing ones, on the basis that established housing is an investment asset rather than a consumption good. This means a significant fall in Sydney or Melbourne property values does not directly reduce the inflation number the RBA is formally targeting.
Is the RBA going to raise interest rates again in 2024?
Financial markets are pricing in a 63% chance of another hike by December. Governor Michele Bullock has said the board will raise further 'if that is what is required,' and underlying inflation is not expected to return to target until mid-2027, which keeps the door open.
How does the housing market affect inflation if it's not measured in the CPI?
Falling house prices make homeowners feel poorer, which causes them to pull back spending — a wealth effect that flows through the broader economy and eventually into inflation. The RBA watches this channel closely even though the direct price signal from existing home values sits outside the trimmed mean it formally targets.
What is the trimmed mean and why does the RBA use it?
The trimmed mean is a measure of underlying inflation that strips out the most volatile price movements at the top and bottom of the distribution, giving a smoother signal of where prices are heading. The RBA prefers it over headline CPI because it is less distorted by one-off shocks, though critics argue its exclusion of existing home prices creates a structural blind spot in a country where housing is the dominant household asset.