For September, we saw national home values rise point eight percent.

It's the highest monthly increase in almost two years.

The Shelbulleck signaling rates could be kept on hold for the rest of the year and warning government actions to address the housing crisis are unlikely to have any meaningful impact on supply.

We understand that you need a whole suite of measures.

We need to boost supply.

We need to increase the capacity of people to own their own home.

House prices are surging again, rate cuts are on the horizon, and first time buyers are getting more help.

So is Australia's property boom back in full swing.

Hello, I'm Chris Burke and welcome to the Bloomberg Australia Podcast.

This week we learned that Australia's house prices arising at the fastest pace in two years, largely thanks to three interest rate cuts this year.

But with the Reserve Bank keeping rates on hold this week, the big question is when, or perhaps even if, the next cut will come.

To help answer that, as well as what all this means for the property market and for your mortgage, we've brought back our favorite economist, James McIntire from Bloomberger Economics.

James, welcome back to the podcast.

Rez.

Thanks great to be here again.

Okay, so the latest data from Cotality on Wednesday showed Australian house prices rose point eight percent in September and that was the fastest pace since October twenty twenty three.

That's nice news obviously if you're a homeowner, but not so great for the many Aussies still struggling to get on that housing matter.

James, were you surprised by those numbers?

Yeah, look a little, Chris.

And they're even a little stronger in the in.

The capital cities as well, a national point eight and point nine in the capitals there.

And so if we think about that point nine month on month, if we play that out over the course of the year, we're all already at close to double digit house price growth for the year.

And so that is, you know, with the RBA having only just begun its easing cycle, that is a little bit of a surprise coming through.

But we haven't seen it.

I haven't seen that pick up being uniform quite yet.

It's really a case of those smaller capital cities Perth, Brisbane, Adelaide that continue to sort of charge ahead, they've been a bit more affordable, but there are some signs that things are beginning to pick up in Sydney and Melbourne.

Yeah, I think volumes were a bit on the low side.

Is that correct?

Yeah, they have been, but what we sort of have seen and there is a risk that if we do get a flood of listings come through, that's unlikely, but if it is the strong demand that we've been seeing, could see things even out a bit.

Okay, So, as I said earlier, the Reserve Bank left interest rates on hold at three point six percent this week, which of course was widely expected, but housing did appear to be a factor in their thinking.

I was ready the statement that accompanied the decision, I know you economists pay very close attention to that as well.

It contained quite a prominent line near the near the top actually of the statement saying that the housing market is strengthening, a sign that recent interest rate decreases are having an effect.

But you know, as as always with the RBA, it's hard to tell whether they mean that as.

A good or bad thing.

I can't really tell.

Well.

I mean, in the one sense, what the RBA has told us in other places is that we need a strengthening in house prices in order to because of what's happened with construction costs, to get the supply of housing, which we desperately need given what's happening with population growth.

To unlock that housing supply, the end price for developers needs to lift in order to make, you know, so that they can make a profit to deliver these homes.

So it's a little bit of good, but you know, a little bit of not so good, given the affordability challenges that we see for many buyers or in the place, and the politics around that in particular.

So a little good, a little bad.

On the when we saw Governor bull express conference, she was asked quite a bit about the wealth effects side of things, and the RBA did talk a little bit about how private demand was also recovering a bit, taking over from public sector demand, which has been the story of the economy for twenty twenty four.

As we rotate into twenty twenty five, we need the public, sorry, the private side of the economy to step up, and so.

That consumer spending could get a little bit of an.

Extra help along by high house prices thanks to the wealth effect coming through too.

So swings and roundabouts for the RBA helpful for demand, but if there's too much demand that might mean that, you know, inflation doesn't come down the way that they're projecting.

But on the other side, if we don't have enough of a house price increase coming through to help unlock supply, will get rental inflation coming through and becoming remaining a persistent problem for the RBA.

There.

So there's lots of different ways they they they come at it, some good, some bad, but on the whole, the way things go with nominal inflation of two to three percent p random wages growth, you are expecting house prices to grow every year.

It's just about do they get that goldilok sweet spot.

Yeah.

But the big question that well homovers definitely want to know is what kind of signals were the Reserve Bank putting out about rate cuts further rate cuts on Tuesday?

Are we getting that Melbourne that Melbourne cut rate cut?

Do you think I know that the inflation appeared to become a bit more of a concern this week in the in that decision.

Yeah, that's that's right.

And what was interesting is that we've seen this with the RBA.

I think we're going to continue to see this with the RBAS, with the cadence of their meetings.

There's four really key meetings a year after the quarterly inflation readings where they do a full update of their forecast and release the statement of Monetary Policy, and then there are the in between meetings.

We think that the rate cut and we've been saying this for quite some time, we think that the rate easing cycle this time around for the RBA is going to be very gradual and data dependent, and the RBAS said the same thing.

And so if at that gradual pace, we think that that means that those rate cuts are coming at the quarterly meetings.

And so this meeting where they did sort of sound that, you know, saying things like, well the monthly inflation data, which they qualified heavily as being partial and can be volatile, it did suggest that there might be some signs that the September quarter CPI, which will be getting before that Melbourne Cup Day meeting, could be a little bit higher than expected.

However, we'll get the full we'll see the full details.

That monthly CPI reading doesn't contain everything, and we did see RBA officials such as Assistant Governor Hunter highlighting that really that monthly CBI isn't.

As useful as many people think.

So it is really going to come down to that quarterly meeting and we think that what we will see when it comes time to meet again and review things in November, that the RBA will be pushing another rate cut out the door.

And also on Wednesday, the government expanded its home Guarantee scheme.

Now that's going to make it possible for a lot more first time buyers to buy a home with just a five percent deposit.

What impact is this likely to have on house prices?

Well, look, this is really interesting, Chris.

So what we've seen is the government had a scheme to help a small cohort of potential first home buyers.

There were income caps on it, and there was also a cap on the property price that the government would help you with only a five percent deposit to get into a home as a first home buyer.

And what the government's done is that they've removed the income cap so that every potential first home buyer, including high income earners, can be eligible to access this scheme, and then they really dramatically increase the cap, so, for example in Sydney, increasing it from nine hundred thousand dollars being the maximum property price up to one and a half million, which is around just slightly below the median house price, so really unlocking a whole bigger pool of buyers and a much much wider pool of potential properties that this scheme could potentially help support people buy into.

And so we think that, especially with sentiment around whether it's time to buy a dwelling being quite recovering or improving somewhat, rate cuts coming through and people knowing that there is even though it's going to be you know, a gradual some meetings will cut, some meetings we won't cut cycle from the RBA rate cuts are coming.

So all of this should add up to some big support, especially at the lower end of the market.

And so what we saw is that we've already seen, even though this scheme only comes into effect for everyone from the first of October.

Totality mentioned it in their release as well, people at those lower end of the market already seeing some improvements from the interest rate cuts that we've had thus far.

But if you're a vendor thinking of selling your home, and you know that if you wait or if you just hold out for a better price, that there is a big, big heap of demand coming, or if you're a potential home buyer that isn't going to use the scheme, you might be tempted to try and get in in an advance.

And that's what we've seen with these price gains being a little bit stronger at the lower end of the market and that momentum seeping into the middle.

As this players out over the next couple of months and over the year ahead, I think we're going to see this momentum building from the bottom of the housing market, held by not just rate cuts but by this first home guarantee scheme from the government.

One of the biggest problems of course for Australia's housing marketers that we aren't building enough homes and that's also contributing to the higher prices.

We got the latest building approval numbers, which are our best indicator of how well or how badly we're doing in that area.

What did they show?

Yeah, so this is this is the thing, right, if we do have this demand from people to buy homes, but if we don't have enough supply coming on, or we have this strong population growth, the supply of new dwellings isn't keeping pace.

That's going to result in this house price affordability and rental affordability challenge being.

Not moving in the right direction.

And unfortunately, what we saw from the building approvals data, we got the August data released by the Bureau of Stats and showed for a second month in a row that our building approvals have declined.

Now you know that they have been improving a bit recently, so we've got to sort of, you know, look through some of the monthly swings and roundabouts.

But over the last twelve months, the rolling twelve months to August, we had about one hundred and eighty nine thousand dwellings approved.

Now that's up from one hundred and sixty seven thousand dwellings in the twelve months to August last year.

So that's better.

That's good.

There's an improvement, some improvement coming through, but it's still falling well short of the government's target.

So the federal government has a target of one point two million homes being constructed over five years, and so that equates to around two hundred and forty thousand dwellings a year.

At one hundred and eighty nine thousand, we're still not there.

And with these monthly approvals not yet moving at the pace that we need and going the wrong way.

You know, this is sort of not what we would hope to see.

And this comes back to that kind of equation about well, what can get us there?

What will help get us there.

Unfortunately, for those that are hoping that this is going to be a panacea, this supply increase for affordability, what is going to help get us there is some of these price rises for dwellings coming through, because that's going to mean that, you know, for those looking to build a home, that it is economic, you know that the economics stack up that it makes sense to pull the trigger with construction costs where they are in order to supply those new dwellings.

So we should see as those home prices arise and interest rate cuts continue to flow through developers, we'll see that yep, they will become more confident and think that, yes, this does begin to stack up and make a lot more sense, and we should see those approvals continue to tick higher over the course of this year.

We need them to if we're not going to fall too terribly far behind those targets at the Federal has said for everyone, and.

That supply shortfall is also a key factor in rental inflation.

Of course, as you mentioned earlier, those totality figures on on Wednesday pointed out that the national rental vacancy rate is at the new historical low of one point four percent.

At that level of vacancy, that's just an incredibly tight market and you'd expect there to be pricing pressure there.

And that's also what the totality data shows on rents, is that rental inflation after having eased from peaks through twenty twenty three and twenty twenty four, it had come down, but it started, it's bottomed, and it's starting to tick back up again.

And if we you know, that could be a challenge for the RBA, if that rental inflation does begin to re emerge as a problem.

So this is where you know, there is that little bit of urgency or concern amongst policymakers about well is a supply coming, because if we do get that rental inflation picking back up, then that could be you know, the RBA will need to find roommel swear within the inflation basket if it's going to meet that inflation target.

When we come back just how much further, our house price is expected to climb in the next year or so.

Welcome back to the Bloomberg Australia Podcast.

I'm Chris Burke, and today I'm talking to James McIntyre, who covers Australia and New Zealand for Bloomberg Economics.

Australia's house prices are climbing at the fastest pace in almost two years, and the latest bunch of economic evidence seems to be telling us to get used to it.

So, James, as we've been discussing, there's more rate cuts likely coming, more government assistance for first time buyers, and nowhere near enough homes being built.

All of those factors are pointing to a pretty significant tailwind for a housing market that's already pretty hot.

What else is pointing to continued growth in the month ahead.

I think that there's two factors we should keep in mind here, population growth and interest rate cuts in when we're thinking about where things might go over the course of the year ahead for property prices or the property market in general.

Now, we've been expecting population growth to slow, and it's eased back from the peaks, but it's remaining surprisingly resilient.

It hasn't fallen back as far as we might have or thoughts and as far and as fast as the government has projected, and that's adding extra demand into the market.

But when it comes to interest rate cuts, I think that's probably the population growth is useful in terms of boosting the demand, but I think the interest rate cuts are going to be probably the more important factor going forward driver and that's the main driver, that's right, And that's because of what rate cuts do.

And what they do is, you know, when interest rates are lower for any given level of income, you can borrow more, and so that borrowing capacity increase.

When we calculate it, we estimate that for every twenty five basis points interest rate reduction from the RBA, it adds four percent to the amount that the average household.

Could borrow or that an individual could borrow.

And so if we think about the three RBA rate cuts so far since February this year, we're looking at a twelve percent increase in borrowing capacity.

We think there's one hundred basis points more over the coming twelve months, so that's going to be an extra sixteen percent.

So we you know, when we add this all together, we're looking at a twenty five to thirty percent increase in ability to pay or in borrowing capacity for the average borrow or household from the beginning of this year to the end of next year.

And that's you know, people are competing for these relatively scarce assets, given that the supply is constrained, and so we think that the natural thing is that, yep, that boring capacity is going to find its way or seep its way into prices and pushing prices higher.

So, you know, the gains that we've seen so far and the pick up in house prices, that's likely to perhaps not at that same pace as we move into the second half of the year, but as we get some momentum coming through in markets and this extra support from that first Home Guarantee scheme from the federal government, it's likely that between by the end of the year and early twenty twenty six we could see a little bit further jump up in these house price house prices like or have experienced over the course of September.

So, just to be clear, the one hundred basis points, you are expecting four more rate cuts of twenty five basis points each over the next year.

That's right, so yeah, we're expecting that the RBA is going to be cutting down to two point six percent.

Now, I know, as you know, what everyone's reaction to, especially that you know that volatile CPI, the monthly one that the RBA has told us not to look at.

Nonetheless, the sentiment right now following that CPI and following the RBA's decision is that, oh, well, you know, it's not going to be that simple, and the RBA might be done.

And we totally agree.

I think it's not going to be that simple.

It's going to be gradual, drawn out affair for the RBA, but as it does draw out, a slow, steady, continued using cycle.

The you know, we had the other week under freedom of information, the RBA releasing a lot of internal documents highlighting how they've dowardly made major downward revisions to their estimates of the neutral cash rate.

That's the cash rate that's you know, not restraining the economy or all boosting the economy, just keeping things in a steady state, and they've pulled that down below three percent.

Now we think that there's some easy in the economy that's still to come, and the unemployment rate will be grinding higher.

We think the RBA is not only going to need to get to neutral, which is below three, but go a little bit further to provide some support to the economy.

And we think as over the course of the next twelve months, that's going to be increasingly apparent and should drag the RBA into additional easing, even though it doesn't sound like it today.

And that might be music to the years to those that are about to jump into the housing market just now, because there's further rate cuts on the way that could, as we point out, with those boost to borrowing capacity, could help spurt prices along over the over the next year ahead.

And would you like to put a number on that?

Do you have a forecast of where you expect house prices to go or what kind of gains you're expecting.

Well, look, no, thank you, famously, I've done that before.

Whoever, I wouldn't be surprised if we saw house price gains in around the six to ten percent range over the course of the of the of the year ahead.

I mean, we're not far off that now, at around just under five percent annual growth at the national level.

And as I said, you know those zero point nine month on month increases.

If we think of those over a twelve month you know that's we're already running it at near a double digit pace.

I don't think it's going to continue that rapidly, but you know, expecting house prices to grow more than double the pace of inflation and almost up to ten percent per adum over the course of the next next twelve months.

I don't think that's entirely unreasonable if we do see the RBA deliver that quantum of rate cuts that we're projecting.

So at the very start, I asked the question, is Australia's properly boomed back in full swing?

What do you reckon?

I think that there's some growing momentum and no two booms or no two booms are alike, but it's a period of fairly robust house price gains ahead you'd expect as the using cycle progresses.

Very measured answer.

Thank you, James.

McIntyre, Thank you Chris.

If you found today's conversation insightful, be sure to follow the Blueberg Australia podcast wherever you listen.

This episode was recorded on the traditional lands of the Warungerie and the Gadagor peoples.

It was produced by Paul Allen and edited by Rebecca Jones.

I'm Chris Burke.