Are red-hot house prices good for the S&P/ASX 200 Index (ASX:XJO) and ASX shares? Here’s why the RBA isn’t too bothered with the hot market
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Apparently last week was the best week for the Australian property market since 2018. That’s according to a report from analytics company CoreLogic, which also outlined how national auction clearance rates hit 84% last weekend.
As usual, that is great for Australians who own properties, and not so good for those who want to (or don’t want to for that matter).
But property has looked hot for months now. And yet no one from the government seems too concerned. Especially the Reserve Bank Of Australia (RBA).
Here is an excerpt from the RBA’s minutes of its meeting earlier this month on the matter:
Members concurred that housing market conditions warranted close monitoring in the period ahead…. Members also discussed the effect that low interest rates have on financial and macroeconomic stability. They acknowledged the risks… linked to higher leverage and asset prices, particularly in the housing market…. The Board concluded that there were greater benefits for financial stability from a stronger economy, while acknowledging the importance of closely monitoring risks in asset markets.
That doesn’t sound like anyone at the RBA is panicking. And there might be a good reason for that. Like it or not, higher house prices help the economy. And not just for the ASX banks like Commonwealth Bank of Australia (ASX: CBA) that write out home loans.
Higher house prices mean new stuff
See, house prices are intrinsically tied to something economists like to call ‘the wealth effect’. Put simply, this refers to the phenomenon that if people feel richer, they are more likely to spend money. Or even borrow more money. And nothing makes an average Australian citizen feel richer than being told their house is now worth $100,000 or $200,000 more than it was a year ago.
Suddenly, that new TV, front deck or car is looking a whole lot more tempting. And viable.
And if more consumers are feeling richer and spending more, it means more cash is going into the economy. And when more cash goes into the economy, the beneficiaries are the businesses that also operate in that economy. ASX shares, in other words. Remember, it’s Eagers Automotive Ltd (ASX: APE) that might be selling those new cars. Or JB Hi-Fi Limited (ASX: JBH) supplying that new TV.
That might be what the RBA means when it says, “The Board concluded that there were greater benefits for financial stability from a stronger economy”.
So if you have money in the ASX share market, you should be welcoming higher house prices. If you already have a house, that’s a double-win. Even though rising property prices reveal a set of challenges of their own, the RBA doesn’t seem too worried. And that’s probably why.
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Motley Fool contributor Sebastian Bowen has no position in any of the stocks mentioned. The Motley Fool Australia has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.