Real Estate Influence on RBA Hotspotting

Part of the obsession by economists with interest rates as the only thing that matters in the housing market is the notion that the Reserve Bank spends a large amount of time discussing the housing market before deciding what to do about interest rates.
As with so many things, economists are wrong about that.
One of the most popular definitions of insanity is doing the same thing over and over again, but expecting a different result.
My own definition of insanity is the average Australian economist discussing real estate.
In essence, those two definitions are essentially the same thing.
Economists, especially those working for the big four banks, tend to believe that everything that happens in residential real estate is dictated by trends with interest rates.
In their simplistic view of things, rising interest rates means falling prices and falling interest rates means a property boom.
They’re utterly wrong about that, because there are always forces more powerful than interest rate movements dictating what happens in real estate – including, right now, the serious imbalance between supply and demand.
The other thing economists and other commentators get wrong is their belief that the property market is the over-riding influence in RBA decisions about interest rates.
In reality, the property market has little or no impact on RBA decisions. There have been repeated RBA statements over the years telling us that the board does not consider its role to include control or influence the property market.
We have seen it in their decision making in the past couple of years, when the prime consideration was trying to bring down the rate of inflation.
So now we have a string of mistaken assumptions from economists leading to the forecast that real estate will struggle late this year because the expected cut in interest rates won’t happen.
The first mistaken assumption is that the board will decide NOT to cut interest rates later this year because property prices are rising. As I said, they have made it clear they’re fundamentally not the regulators of the real estate market.
The second mistaken assumption is that cutting interest rates would cause a property boom - or that keeping interest rates at their current levels will suppress the market.
Economists are clearly not students of history.
In the late 1980s we had interest rates rising and rising to levels far higher than today and ultimately as high as 17%, if you can believe that – and despite those obscenely high and rising interest rates, property prices kept rising and rising. 
It was one of the most spectacular property booms in the nation’s history.
In the early years of this century, we had several years of interest rates high and rising, and property prices kept on increasing.
And then again last year, 2023 had repeated increases in interest rates and – notwithstanding the doomsday forecasts of economists – house prices rose strongly in most locations, including well above 10% in a number of our capital cities.
Meanwhile, the years before Covid had extremely low interest rates but property prices were falling and in 2020, the year of the lockdowns, interest rates went to record lows but there was no property boom (although prices did show moderate growth).
When markets boomed in 2021, it was driven by a host of factors, including a high level of government incentives and spending to generate economic recovery.
So, in summary – whether or not the Reserve Bank decides to cut interest rates later in the year will depend on their view of inflation and the state of the national economy. Events in the real estate markets will NOT dominate the conversation.
If they do decide to cut interest rates, it will NOT generate a property boom. 
The big factor will continue to be the shortage of dwellings, regardless of any decisions about interest rates.