Fireside Chat
Fireside Chat at the AFR Property Summit
Sarah Hunter
Assistant Governor (Economic)
AFR Property Summit
8 September 2026
–
Sydney
Audio
19.5MB
Watch video: Fireside Chat with Sarah Hunter, Assistant Governor (Economic), AFR Property Summit, Sydney
John Kehoe
Good afternoon, everyone, and welcome, Sarah. Thanks for giving up your time to be here at the AFR
Property Summit. Obviously, there’s been a lot of discussion about the recent downturn in house
prices here. How much does the RBA focus on house prices in terms of impact on the economy, but also
when you’re considering interest rates as well?
Sarah Hunter
Yeah. Look, John, thanks for having me. It’s a pleasure to be here. Look, they are an important
part of our focus because the housing market, in its very broadest sense, is an important
transmission channel for monetary policy. So we know interest rates have an impact on the housing
markets and housing sector, if you like, through a number of different channels. So that’s
really why we focus on it. We don’t have a target for house price growth or the level of house
prices or anything like that. It’s not what we’re aiming for, but we are interested in it
because of its impact through the economy.
John Kehoe
Mm. Consensus forecast, give or take, from a lot of the bank and other economists suggest that maybe
national house prices could fall in this downturn because of a combination of interest rates and the
government’s tax changes by maybe about 10 per cent, a bit more in sort of the
interest rate sensitive markets of Sydney where prices are already high. Is that broadly in line with
what the RBA’s forecast or assumptions are, or are you …?
Sarah Hunter
Yeah. So, we put out our latest forecast, it’s only a few weeks ago, actually, in August. It
feels a bit longer than that now. And in that, we had a technical assumption, and it sat within the
sort of range of market forecasts that were out there. And so at that point, some of them were a bit
lower than that, actually more in the 3, 4 per cent bracket. Others were sort of the figure
that you’re talking about.
In terms of if that kind of size of correction did materialise, we think about it having an impact on
the economy through three main channels. One of which we’re already seeing right now, I’m
sure many people in the room can empathise with this actually, turnover in the housing market.
That’s the most immediate channel through which a house price correction tends to start coming
through. We see lower turnover. We already had turnover fall in the March quarter, and again in the
three months to the end of June. And based on what we can see around the volumes data, it’s
probably fallen again in the current quarter. So that’s the first channel and the most immediate
channel.
Second channel that we pay a lot of attention to is the impact on consumer spending, so the wealth
effect, if you like. This one’s interesting. I think it might be a surprise for people to hear
that it’s actually a relatively small channel. In the near term, it’s quite concentrated on
spending that is associated with moving house. So furniture, you move into a place and you want to
buy a new sofa because the old one doesn’t fit, that sort of thing. But that’s actually
quite a small component of total household spending. It does get a little bigger over a one to two
year horizon, as that sort of the general drop in your household wealth comes through and you maybe
don’t purchase a car that you might otherwise have purchased. But honestly, that channel is
actually quite small. And so, for that to really be substantial and for something that we would
really start to see driving household spending, we’d have to see something like that
10 per cent fall if that did materialise, that you said, sustained. So no recovery in house
prices over a one to two-year horizon. And so that, at least in historical context, would be quite
surprising to see. Normally, what we see here in Australia, house prices do trend down. They’ve
trended down before, and they probably will again. We’ll have other cycles in the future. But
normally they recover. We see a recovery, right? And in the context of having struggles with supply,
and I know much of the conversation this morning spoke to that, if we’ve got a supply shortage,
then that’s going to put upward pressure on prices, and we’d expect to see that coming
through. So it’s really a question of how deep the downturn is, and then at what point does it
start coming back up.
And then the third channel that we pay a lot of attention to is construction activity itself. So, what
does this move in house prices mean for the viability of projects for developers and how does that
come through in terms of new dwelling construction?
So three channels, multiple channels. But yeah, our sense at the moment is that given everything else
that’s going on, that we wouldn’t expect right now to see a recession or anything like that
in the economy. That’s not our baseline forecast.
John Kehoe
Yeah, we had developers here today saying this housing downturn is going to lead to a full-blown
recession, unless the government reverses changes, and that’s tax changes, it should reverse its
course. So that’s not in your prognosis?
Sarah Hunter
That’s not our baseline forecast right now. But it is true that we are expecting by going into
late ‘27, ‘28 for dwelling construction activity to actually be falling a bit. So,
that’s a downturn in that particular sector, and many people in the room will know that, will
remember previous downturns. So, we do expect that to happen, but we don’t currently think that
we’re going to see a recession, no.
John Kehoe
And the turnover impact, you said that’s the most immediate. We’re already seeing evidence
of that in the data. What sort of things are we talking about there? Where does that flow through?
What parts of the economy?
Sarah Hunter
Yeah. So that’s all the activity that’s really associated with buying and selling a house. I
know we’ve got some real estate agents in the room that probably are turning over fewer sales.
So that’s one of those components. Conveyancing. Even right down to the movers that help people
move property from A to B. All of those services that are associated with people moving house,
that’s what gets captured there.
John Kehoe
Okay. And with consumptions about, I think two-thirds, 60 or so per cent of the economy overall,
how much does this all matter in the grand scheme of the economy? We’re going to see a little
bit less turnover. We’re seeing a lot less turnover that flows through to those activities. We
see a little bit of an impact from the lower wealth effect and then down the track, construction in
maybe the next one to two years. Overall, in the grand scheme of the economy, how much difference
does that make, do you think, to GDP overall?
Sarah Hunter
Well, so it’s definitely going to slow things down, and that’s relative to what they
otherwise would have been. But I guess it’s worth keeping in mind that in the context of the
Board’s decisions earlier this year with interest rates to raise the cash rate three times and
what we’re talking about in our Statement of Monetary Policy and what the staff have talked
about for some time, what I’ve been talking about for a while, we are just trying to slow things
down a bit. We’re trying to rebalance demand and supply in the economy. So we do want to see
slightly soft momentum relative to trend. So we’re just trying to take a bit of that
inflationary pressure out of the system to bring inflation back down. And inflation is obviously
elevated. It’s above target right now. And there’s a number of global factors that are part
of that, but we also think that there’s domestic capacity constraints still. And I find it kind
of interesting actually, to talk to developers and people in the construction sector, because
it’s one of the sectors where we get told quite frequently, "No, we’re still constrained.
We can’t get the tradies that we need to do the work that we’ve got on the books. If we
could do more, we would. The demand is there, but we really can’t meet it." So actually,
we’re just trying to take some of that pressure, if you like, out of the system. That’s
what interest rate rises are designed to do. And so in that context, a bit of a slowdown that comes
through directly through the housing market and into the broader economy, actually, in terms of the
inflation target, is what the Board were trying to do with the interest rate hikes earlier this year.
John Kehoe
So paradoxically, this slowdown might actually help the Reserve Bank in its task to get trying to get
inflation back under control.
Sarah Hunter
Well, we’ll obviously have to see how it all plays out. But in taking an all other things equal
position, which economists love to do, yeah, those three rate hikes at the start of the year, we
understand and we know cyclically that will put some downward pressure on house prices and will slow
things down a bit in the housing sector more broadly. That is part of what we’re trying to
achieve through transmission. We’re trying to just, yeah, cool things off a bit, if you like, to
bring inflationary pressures back down.
John Kehoe
But what about on the flip side of that? One of the concerns is that we’re going into a supply
squeeze potentially for construction and housing going forward. Maybe less investors in the market
might be encouraged less to develop new dwellings. Presumably, that could put upward pressure on
rents maybe, and that pushes inflation up. Is there a risk here that actually we do get a supply
crunch and therefore rents go actually higher?
Sarah Hunter
So we’re definitely paying very close attention to rents. It’s a key component in the CPI,
and what we’ve seen in recent years is that the pace of rents growth has been a fair amount
higher than it was pre-COVID, and it’s been part of the inflation story, and it’s one of
the categories that we monitor and we talk about pretty frequently.
Rents really is a product of what happens in very local markets, actually. It’s the balance of
demand and supply in those markets, and then rents will come through. And then obviously, you can
aggregate that up to city, state, and national level as an average. So yeah, look, we are very
mindful and we do have through our models the type of channel that you’re talking about. And
again, it really does depend on what exactly does happen to new supply, what does happen to demand in
some of those local markets as well, and where all of that shakes out. But we’re certainly alive
to the rents channel. It’s one we pay close attention to.
John Kehoe
Excellent. I’m just going to check my questions here. There’s been a lot of debate about how
much of a contribution the government’s recent tax changes have made to the softening of the
housing market and how much the RBA’s three rate rises, plus the potential for more coming down
the pipeline, are having impact. Have you got a view on what’s had a bigger impact? What’s
had the majority? What’s had the minority view on the prices and also the other turnover effects
and things like that?
Sarah Hunter
Yeah. We really don’t unpack it into all of those different channels very discreetly, because
we’re really concerned about the aggregate impact, because ultimately that’s what matters,
and that’s what’s going to drive the outcomes going forward from here through the economy.
And that’s what really matters for setting interest rates today. We want to understand where we
think things are going to play out going forward, and then the Board can make their decisions, and
obviously we provide our advice as the staff. So we’ve not unpacked into those different
channels. But we do think that, I suppose actually I’d add a third one to the two that you
mentioned, the general confidence and sort of consumer sentiment dropped very sharply at the start of
the Middle East conflict. It’s come back a bit since then, but it’s still pretty subdued.
We think that’s also playing a bit of a role. So there’s multiple things running through
the market right now. And those things are all sort of coming together, and things are playing out as
they are. And we really do look at it at that sort of aggregate level and then think about what that
means going forward.
John Kehoe
We’re talking mainly residential property today, but yesterday the Summit was talking more about
commercial property. One of those areas is the AI data center boom that we’re experiencing at
the moment. What sort of impact is that having on the economy? It almost seems to be working in the
opposite direction of the softening in the housing market at the moment.
Sarah Hunter
Yeah, no, it’s quite remarkable, isn’t it? 12 months ago, a few people were talking
about this, we started to pay attention, but it’s certainly been a lot larger than we were
anticipating, than a lot of people were anticipating. And you’re right, what we hear in our
liaison program actually when we talk to the developers that are working on these projects is that
there’s a lot of appetite to get this work done. There’s appetite to do it quickly as well.
They want these centers built really rapidly, as fast as possible in some cases. And it’s
definitely adding to demand. You can see business investment has picked up really strongly over the
last sort of nine months or so, 9 to 12 months, double digit growth, and a decent chunk of
that is data centers. Not all of it actually, but a decent chunk of it is data centers. So it’s
certainly adding to demand in the economy.
The only caveat with it, which is kind of interesting, is that we import a good chunk, if not all, of
the equipment that’s actually inside the data center. So as somebody described it to me, we have
to build the shed locally, so we need labour and resources and things to do that. But the actual
racks, the servers, the wiring, everything else that’s physically inside the shed, we import all
of that pretty much. So it comes through as extra demand. But then because we’re meeting some of
that demand with imports, it doesn’t add quite as much as you might expect to domestically
driven activity. So there’s a bit of an offset there on the import side. But notwithstanding, it
is significant, something that we’re now tracking much more closely than we were a year ago.
John Kehoe
Is it having an inflationary impact in the sort of infrastructure or housing construction sector more
generally for labour and materials? Or is that just a risk at this stage?
Sarah Hunter
So we are hearing some anecdotes about that, about labour that’s being drawn into these projects,
and therefore being drawn away from other parts of the construction sector. Still pretty early to
know the size of that, though. It could be just one or two stories. It could be a bit more
widespread. So certainly, it’s something we’re monitoring, and you can think of it as a
risk. But we are hearing some stories about that, particularly in Sydney and Melbourne.
John Kehoe
A couple of questions here on screen. Are you concerned with the forecast slowdown of dwelling
construction in ‘27 and ‘28? Given the government supply targets, won’t these push up
house prices and also increase inflation?
Sarah Hunter
Yeah. Well, so in the context of the slowdown in dwelling construction, yeah, look, that will
definitely have obvious implications for the number of homes that are completed. As I said earlier,
we expect through the sort of back half of our forecast ‘27, ‘28, that you’ve
mentioned there, for the level of dwelling construction activity to fall a bit. So that will be fewer
homes completed, if you like. Still positive, but just a bit lower than it is in the previous period.
In terms of what that means for house prices and rents, house prices don’t actually appear in the
CPI, so they’re a slightly separate channel. But in the context of inflation more broadly and
rents in particular, and we talked about that earlier, yeah, that’s certainly something that
we’re monitoring. But it’s also that type of channel, if you like, together with general
growth in demand that we have with a country with pretty strong compared to other countries,
population growth. Demand is going to keep tracking up over this period as well, and that’s why
our expectation is that we will find a bottom to the house price correction, prices will start coming
back up. But as I said earlier, it’s a question of how far down and how quickly do they start
coming up.
John Kehoe
Yeah. An online question asks, "Is the Bathla situation likely to snowball into something bigger to
worry about? What are you looking out for?"
Sarah Hunter
Yeah, great question. So we’re monitoring – because our remit in this space, and this sort
of goes a bit more into financial stability in the financial system and health there rather than
directly into construction. We’re monitoring it, and we always are. It’s our job to monitor
it in the context of systemic financial risk, systemic financial stability concerns. And so private
credit has been an area that we’ve paid much more attention to recently. It’s grown
relatively rapidly in recent years, as I’m sure many in the audience know. We’re definitely
monitoring it. We don’t at the moment see systemic signs of stress, so we can’t see that
it’s sort of spreading through a bunch of our banks and everything else. But it’s certainly
something that we’ll keep an eye on. And clearly, for the people that are directly exposed to
that particular situation, the workers and others, it’s a pretty tricky time. But right now,
from our perspective, we don’t see a systemic risk.
John Kehoe
I’ve got a question here from online. He asks, "Given Australia’s recent migration levels
have added significant demand for housing, furniture, appliances and other household goods, how
material is migration as a driver of inflation, and is monetary policy effectively being used to
offset inflationary pressures created by population growth?"
Sarah Hunter
Yeah. I often get asked about migration and its impacts on the economy because we do have, as I said
earlier, relatively high levels of migration here compared to other advanced economies. When
we’ve looked at this question, two observations that I think I’d make. One is that while
migrants do when they come here, they do add to demand. They need somewhere to live. They go out
shopping, they’ll eat in restaurants and what have you. They add to demand. Many of them, and
certainly if they’ve come on a working visa, will definitely contribute to labour supply as
well. And so they add to demand, but they also add to the supply capacity of the economy. And if we
look over a sort of medium-term perspective, those two things actually tend to balance each other
out, and we don’t find much evidence for migrants being inflationary in that way. Where we can
see some differences is if we get large moves in migration in local rental markets. And the really
good example of this actually was through the COVID period. So in the early years of COVID, where we
had the border closures and the lockdowns and students couldn’t come into the local economy, we
actually saw rents fall in inner Sydney and inner Melbourne around the universities. Fall quite
sharply because that demand was taken out, if you like. And then when we reopened and the students
came back, those rents started to rise quite rapidly. So I like that as a recent example of how you
can see those kind of effects in some rental markets. But on a big, broader picture basis, we
don’t see much evidence for migrants being inflationary in the medium term.
John Kehoe
Last question from an audience member, then one last one from me. "How do high interest rates slow
inflation when the drivers of inflation are external factors such as fuel costs driving up goods and
services costs?"
Sarah Hunter
Yeah. Great question. So the question, you’re absolutely right. We can’t do anything about
global oil prices with interest rates. So that is what it is. And I have to say, one of the risks
that we’re tracking at the moment around inflation, and we are concerned, the Board are
concerned about inflation, is global oil prices, which have tracked up quite sharply just in the last
couple of weeks. So we’re monitoring that very closely, they’re certainly higher than what
we had assumed in our August SMP, given everything that’s played out. We can’t do anything
about those. But what we can do with interest rates is make sure that the domestic conditions are
such that we haven’t got domestic inflationary pressures. So that’s a question of balancing
and keeping balance between domestic demand, domestic supply. And if we’ve got demand
that’s running ahead of supply, that can then create those inflationary pressures, those
capacity constraints. But we also want to make sure when it comes to these global shocks, that they
don’t start to sort of embed themselves and pass into how we all think about inflation locally.
So we tend to call those the indirect effects or the second-round effects. We want to make sure we
don’t see those. And so that’s something, again, that interest rates can tackle because
that’s a domestic focus. So yeah, we can’t do anything about the oil price, but we can do
something about those domestic factors, and that’s what we’re really focused on.
John Kehoe
A lot of people in this room are interested in what’s going to happen to interest rates. We saw
inflation very recently, underlying terms coming around about 3.5 per cent or so. Still
quite a way above the 2.5 per cent target. The Monetary Policy Board meets September 28,
29. I think the market’s pricing in roughly about a two in three chance of a rate rise. Does
that sound sound? I mean, is the Board going to have to seriously consider raising interest rates
again soon?
Sarah Hunter
Yeah, no. Great question. I think the Board have been pretty clear. The staff as well. Certainly
myself, pretty clear that inflation is top priority right now. As you said, inflation is above
target, has been for some time. And I think more than that, in the August SMP, we’re pretty
clear to say we think that the risk to inflation relative to that baseline forecast was skewed to the
upside. I mentioned oil just now. That was one of those risks, and we are definitely concerned about
that in recent moves. I think also looking at that July data, it’s only one month. You’ve
got to be careful. One month of data, you never know. It can sort of swing around and be a little bit
volatile. But notwithstanding, if we looked at the components of that, where we did see strength were
in a lot of the domestic factors, so market services, new dwelling construction costs that come
through, and we talked about rents earlier on, just as three examples. So yeah, look, we’re
definitely concerned about that. The Board are concerned about that, and I think they’ve been
pretty clear that they don’t really have tolerance for inflation to continue to be, and an
expectation that it remains above target for an extended period. So what actually happens? Well,
we’ve got more data and more water to go under the bridge before the next meeting. But yeah, the
Board I hope have made really clear their concern, and the staff share it. We are concerned about
inflation, and if there is a sense that inflation’s going to be stronger than we think in the
context of our forecast, that the Board may well have to raise interest rates to tackle that.
John Kehoe
Sarah Hunter, Assistant Governor of the Reserve Bank, thanks very much for your time at the Financial
Review Property Summit.
Sarah Hunter
Thank you.