Mortgage-holders face an anxious wait as the Reserve Bank of Australia puzzles over mixed signals from the housing market and the broader economy in deciding whether to hike or pause interest rates on Tuesday.
High interest rates have dampened interest in borrowing to buy a home, which slipped almost 1 per cent lower in February to be down by one-third in little more than a year. But approvals for new dwellings increased by 4 per cent and a 10-month nationwide slide in property prices came to a halt last month.
The jumble of results follows the release last week of Australian Bureau of Statistics figures showing the pace of inflation has eased in the first two months of the year to 6.8 per cent - a level still well above the central bank's 2 to 3 per cent target band.
Australian National University economist Timo Henckel said although inflation was still too high and the labour market remained "very firm", business indicators pointed to a deterioration in the outlook for both manufacturing and services and the central bank would also be mindful of the pressure on household finances.
"The real estate market remains an important risk factor," Professor Henckel said, particularly given the decline in house prices for much of the past year and the extent of mortgage stress.
The ANU economist warned strong employment was currently shielding most households from defaulting on their loans but even a small increase in the jobless rate could "change the picture significantly".
Markets expect the RBA will take a cautious approach and hold rates steady at Tuesday's meeting while it assesses the effect of the 10 rate hikes delivered since last May. That's a view shared by several members of the ANU's RBA shadow board, including JB Were economist Sally Auld and St George Bank chief economist Besa Deda.
But overall, the shadow board thinks a hike to 3.85 per cent is the most appropriate outcome, rating it as 66 per cent likely to be the optimal move.
Shadow board member and former RBA board member Warwick McKibbin said tighter monetary policy was needed because of persistent high inflation and the lower dollar.
"Higher interest rates are not only needed to slow consumption but also to offset the weaker Australian dollar, which feeds further into imported goods inflation," Prof McKibbin said.
He warned the longer the central bank takes to bring inflation down, the greater the risk other costs like wages would accelerate, "making the work of monetary policy that much harder over the medium term".
Fellow shadow board member, Centre for Independent Studies chief economist Peter Tulip, warned pausing rates could also inflame, rather than calm, fears for the stability of the financial system.
Prof Henckel said although a pause was the most likely outcome, the central bank could instead decide on a 0.15 of a percentage point hike to flag its ongoing concerns about inflation without inflicting the same hit to growth a larger move would make.
Uncertainty about the April rate move comes as concerns about the supply of affordable housing deepens.
Commonwealth Bank economist Stephen Wu said despite a small 4 per cent lift in building approvals in February, the annual rate was just 183,000, far below the level of 230,000 achieved in mid-2021 and well short what was needed to meet increasing demand.
"The impact of lower housing approvals and therefore construction will be felt in both the rental and mortgage market over the coming period, especially when combined with the rapid return of net overseas migration," Mr Wu said.
"We expect this to keep vacancy rates low and to continue to push up rents."
The warning follows the release of research by the National Housing Finance and Investment Corporation warning almost 378,000 families were in housing need and 331,0000 were in rental stress.
The study found the housing shortage would balloon to more than 106,000 dwellings over the next four years, with a net 148,500 homes to be built this financial year and just 127,500 in 2024-25.
Federal Housing Minister Julie Collins seized on the findings to intensify the pressure on the Opposition and the Greens to support the government's Housing Australia Future Fund.
Ms Collins said "too many Australians are struggling to secure safe and affordable housing" and the HAFF would help address the issue.
But the Opposition has slammed the funding model and the Greens have said the fund is too small to address need.