Rate-cut price response sees the rich get richer

Rate cuts tend to make the wealthy wealthier, research from the Reserve Bank shows.

Rate cuts tend to make the wealthy wealthier, Reserve Bank research shows.

RBA economists Calvin He and Gianni La Cava studied property markets at a local level to find how monetary policy affected ­prices. They found areas with higher house prices tended to be more sensitive to changes in monetary policy than those with cheaper ones.

They found that a one-percentage-point cut in rates ­tended to lift the average-priced property market by 2.3 per cent after two years. But for the cheapest property markets (bottom quarter by price) the impact was only 0.9 per cent, versus an outsized 3.5 per cent change to values in markets in the top quartile.

The result is that “changes in the cash rate alter housing wealth inequality”, the economists concluded. “Lower interest rates ­increase housing wealth ­inequality, while higher rates do the opposite. This occurs because expensive areas, which typically have tighter housing supply, are more sensitive to changes in ­interest rates.”

Also, areas “with more mortgage debt, higher incomes and more housing investors also have larger housing price responses to changes in monetary policy”.

CoreLogic research director Tim Lawless said the data from the most recent property market downturn and rebound supported the RBA’s findings, with more expensive homes falling more during the downturn and then ­rebounding more strongly since the middle of last year.

But Mr Lawless said the downturn was driven by factors other than rates, including tighter lending conditions. This suggests high-end property markets are more responsive to changing conditions more ­broadly.

Nonetheless, it was “really clear” monetary policy over a number of years had tended to favour richer property owners.

 

Over the past decade, Australians in the country’s most ­expensive homes have made more than four times the money of those in cheaper houses, Mr Lawless said. The top quartile of capital city house prices lifted by 50 per cent, Mr Lawless said. In dollar terms this equated to capital gains of about $305,000.

In contrast, the lowest quartile of capital city properties by price was up a little under 20 per cent over the same period, equivalent to a rise of about $74,000.

The RBA modelling was based on the impact of individual rate hikes, but “what has been happening over the most of the past ­decade is rates have been falling”, independent economist Saul ­Eslake said. Rates peaked at 7.25 per cent in August 2008, and have since ­fallen to a record low of 0.75 per cent, including three rate cuts last year.

Mr Eslake said he was not surprised by the RBA’s findings, and he agreed falling rates had exacerbated wealth inequality. “There has been more focus on this in the US and Europe: that all else being equal, the pursuit of very easy monetary policy has tended to ­increase inequality,” he said.

The political response to ­inequality and affordability “was given at the last election”, Mr ­Eslake said, referring to Labor proposals to curtail tax concessions for homeowners and investors, which were rejected by voters. “The electorate isn’t interested in measures to address ­inequality in the distribution of housing,” he said.