According to the Futunn Financial APP, the Reserve Bank of Australia will hold an interest rate decision this Tuesday. The record-high household debt in the country is a key factor in the cautious tightening policy of the bank. Currently, housing is an important consideration for maintaining stable interest rates during an easing cycle.

Housing costs, including rent, account for about one-fifth of Australia's consumer basket, making it the second-largest inflation driving factor after the service industry. This helps explain the tough remarks made by Michele Bullock, Governor of the Reserve Bank of Australia, and why economists believe that the bank will maintain the cash rate at the high point of 4.35% on Tuesday and continue it at least until February next year.

The Federal Reserve implemented an easing policy last week, while the Reserve Bank of Australia's message is clear: it is premature to consider a rate cut. Australia's potential inflation rate is 3.9%, well above the target range of 2-3%, and the central bank expects it to return to this range by the end of 2025.

Stephen Miller, an investment strategist at GSFM, said, "Given that the Reserve Bank of Australia is not as proactive as the Federal Reserve in raising policy rates to combat inflation, the situation in Australia may not be a coincidence. On the other hand, it may need a bit more patience in reducing spending."

Several economists, including Westpac Banking and Goldman Sachs, expect that when the Reserve Bank of Australia eventually starts cutting interest rates, it will enter a mild easing cycle with its cash rate peak about 1 percentage point lower than the Federal Reserve's.

As one of the most indebted countries among developed nations, the Reserve Bank of Australia has been concerned about the extent of austerity that the people of the country can bear from the beginning. But it turns out that the supply side is the main issue, as the surge in immigration and soaring housing construction costs after the pandemic have caused a housing shortage. This has led to a surge in rent, exacerbated inflation, and continued to drive up real estate prices during a period of restrictive policies.

Government data shows that in July, mortgage loans (excluding refinancing) increased by 3.9% from the previous month, while housing loans issued to investors surged by 5.4%, a 35.4% increase from the same period last year. The level of investor loans is 11.7 billion Australian dollars (7.97 billion US dollars), close to the peak in January 2022.

Denita Wawn, CEO of Masters Builders, said that since the outbreak of the pandemic, the construction time for new projects has been extended by about 20% from approval to completion, while costs have risen by about 40%, driven by strong housing demand.

"The government's primary task should be to increase construction and building labor," Wawn said, calling for an increase in the number of skilled immigrants. "We can't fill this gap domestically."

A government report shows that among the 114 industries that make up the Australian economy, the residential construction industry ranks second in terms of economic multiplier. Every 1 million Australian dollars of residential construction output can support 9 employment positions, highlighting the importance of the industry.

According to Diana Mousina, Deputy Chief Economist at AMP, labor and material shortages mean that housing starts over the past 12 months have been 165,000 units, far below the 250,000 units needed to meet demand.

Rising input costs and a nationwide housing shortage have driven the year-over-year rental inflation rate to 7.3% in the second quarter, while property prices in Sydney have also reached new record highs. The danger lies in the fact that any interest rate cuts would further stimulate the real estate market.

However, some economists believe that the Reserve Bank of Australia will not wait for the real estate market to cool down before starting rate cuts.

James McIntyre, a Bloomberg economist, said, 'The Reserve Bank of Australia hopes to see housing costs decrease, but it doesn't necessarily have to wait for them to decrease before starting rate cuts. Employment and domestic demand are more critical.'

The Reserve Bank of Australia's interest rate hikes have significantly slowed economic growth, primarily due to weak consumer spending, despite strong population growth and higher government expenditure pulling Australia out of recession. Meanwhile, the labor market has unexpectedly maintained resilience, with an unemployment rate of 4.2% in August.

Oxford Economics believes that Australia has never truly experienced a situation of weak GDP growth and extremely low unemployment rate in modern history. Economist Sean Langcake pointed out that low productivity and a mismatch between monetary and fiscal policies are among the factors contributing to a slow deflationary cycle. He expects rate cuts to begin in the second quarter of next year.

Gareth Aird, of Australia's largest bank, the Commonwealth Bank of Australia, said that with the easing of pressure on building expenditure and rental prices, the outlook for housing inflation is 'slowly improving'.

Aird said, 'In the third quarter of 2024, the stronger-than-expected slowdown in inflation will be a necessary factor for the Reserve Bank of Australia to begin an easing cycle this year.' 'However, the evolution of the unemployment rate will also play a significant role in the central bank's interest rate cuts in line with its global peers.' It is reported that third-quarter inflation data will be released on October 30th.