Markets 
It’s the helping hand that surprised even the Reserve Bank.
The bank always knew that its three rate hikes – in February, March and May – would slow the property market.
While governor Michele Bullock will say up hill and down dale that the bank does not target asset prices, the RBA’s interest rate rises were all aimed at taking steam out of the economy. And, as the Reserve Bank knows, climbing house prices make people feel wealthier and happier, leaving them more likely to open their digital wallets.
The so-called wealth effect also works in reverse. Falling property prices are more likely than not to make consumers a little wary when it comes to spending a dollar, adding to any deflationary pressures in the economy.
Property prices, particularly those in Sydney where residents don’t get out of bed unless they’ve got a $900,000 mortgage strapped to their back, were already responding to the RBA’s rate hikes through March and April.
But it is clear that the May budget, and Treasurer Jim Chalmers’ array of changes to negative gearing and capital gains tax, is amplifying those higher interest rates.
This wasn’t on the Reserve’s radar when it started jacking up interest rates in February. While the government was considering a range of tax changes, it was a long way off from a settled position. And even that was upended by the events of February 28 when the US and Israel began their war against Iran.
Economists often bemoan that the RBA and the government of the day are often in conflict. There were plenty upset that the May budget contained a forecast deficit of $31.5 billion, larger than the just completed financial year.
Yet, it is apparent – especially if you spend your time tracking the social media posts of real estate agents – that the government’s tax changes have contributed to the nationwide slowdown in prices and auction activity.
If people aren’t buying and selling homes, their demand for everything from real estate agents to removalists to new furniture also falls.
Last week’s better-than-expected inflation figures revealed some deep falls in prices for goods associated with the housing sector. Furniture prices in Sydney, for instance, fell by 4.6 per cent. Household textiles fell by 2.1 per cent. Household appliances were cheaper, both for large ones (minus 1.9 per cent) and small (minus 0.7 per cent). Even glassware and tableware prices tumbled by 5.5 per cent.
Some of those falls are likely due to the stronger Australian dollar which pushes down the price of imported goods. But a slowing property market means people are less likely to want or need new furniture or plates or refrigerators.
It also puts pressure on lenders to offer better deals – aka, cheaper prices or improved services – to win customers from a diminishing pool.
Chalmers and the rest of the government will never admit that their policies were aimed at cutting property prices. And the Reserve Bank is loath to concede that a drop in house values is a positive in its ongoing fight against inflation.
Not that we have hit an affordability nirvana quite yet. Sydney’s median house value is still above $1.5 million. Also in the $1 million club are Brisbane, Adelaide, Perth and Canberra.
Melbourne is not part of the $1 million club – something for which prospective home buyers should be glad.
Even the drop in values revealed by Cotality today takes the national dwelling value back to where it was in March. So, we’re not quite back to the 50 per cent price crash of the 1890s.
But the interaction of tighter monetary policy and fewer tax incentives for investors in the property market is clearly helping in the battle to get inflation down.
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Shane Wright is a senior economics correspondent for The Sydney Morning Herald and The Age.Connect via X or email.From our partners
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