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Free AccessMNI ANALYSIS: Broad Housing Downturn Risk To RBA MonPol Stance
--Further Slowing Of Housing Market Could See Rates On Hold Longer
By Sophia Rodrigues
SYDNEY (MNI) - Australia's weak housing market faces the prospect of a
bigger downturn that could threaten the economy's growth prospects, pushing the
Reserve Bank to amend its monetary policy outlook to one clearly signalling that
the cash rate would remain on hold for longer.
Currently, the RBA's guidance says the next move in the cash rate is more
likely to be an increase than a decrease, but with no strong case for a
near-term adjustment in monetary policy.
--GUIDANCE HEADWIND
There are several headwinds facing the housing market but perhaps the
biggest of them all is that there is no expectation the RBA will lower the cash
rate from the current 1.5% -- an expectation largely the result of RBA guidance.
Including the current one, there have been at least seven episodes of falls
in national housing prices since 1980, with the Sydney region seeing eight.
However, the current weakness cannot be compared with any of the previous
episodes, as this one is happening at a time of record low interest rates and,
according to ANZ economists, nearly all previous corrections occurred following
interest rate rises.
With no expectation of a further cut in the cash rate, the one major factor
that could potentially reverse the trend is absent, which in itself could make
the current decline self-fulfilling.
--CORRECTION INTO DOWNTURN
Falling housing prices aren't necessarily a bad thing and are, perhaps,
needed after the sharp gains seen in the last 5-6 years. Despite recent
declines, national dwelling values are still around 30% higher than five years
ago, with Sydney nearly 60% higher.
However, the risk is that the orderly correction seen so far could become a
prolonged weakness, with other cities mirroring the decline in Sydney prices.
And this was the signal from the July home value index report from Corelogic
published Wednesday.
Prior to June, the weakness remained concentrated in the two major cities
of Sydney and Melbourne, but Perth has joined the declining spree, down 0.8% and
2.3% y/y in July. Brisbane, Adelaide and Hobart are also showing downward
pressure.
--HOUSING PRICES IMPORTANT
The RBA's growth and inflation outlook focuses on household spending and
activity related to the housing market, as both are important drivers for growth
and inflation, with housing rent also an important contributor to inflation.
In the current economic cycle, housing prices are assuming a more important
role as income growth is slow, meaning rising wealth is expected to be a
contributor to spending decisions.
In the May Statement on Monetary Policy, the RBA highlighted this risk,
noting the cooling of conditions in the established housing market did not
appear to have dampened consumption growth.
"Although the earlier gains in national housing wealth may not have
encouraged much additional consumption, it is possible that households'
consumption and saving decisions could be more sensitive to an easing in housing
price growth," the statement said.
The RBA has so far appeared unfazed with the weakening trend in the housing
market, as its main focus is on household indebtedness which would continue to
rise if credit growth doesn't slow.
But the RBA is likely also aware of the delicate balancing act needed.
Slowing housing prices and slowing credit is desirable but what can hurt the
economy is if this slowdown becomes entrenched and morphs into a major downturn.
That could hurt the economy more.
With resistance to lowering the cash rate further, the RBA's path of least
regret might be to change the forward guidance and clearly commit to 'hold for
longer'.
--MNI Sydney Bureau; tel: +61 2-9716-5467; email: sophia.rodrigues@marketnews.com
[TOPICS: MALDS$,MMLRB$,M$A$$$,M$L$$$,MX$$$$]
To read the full story
Sign up now for free trial access to this content.
Please enter your details below.
Why MNI
MNI is the leading provider
of intelligence and analysis on the Global Fixed Income, Foreign Exchange and Energy markets. We use an innovative combination of real-time analysis, deep fundamental research and journalism to provide unique and actionable insights for traders and investors. Our "All signal, no noise" approach drives an intelligence service that is succinct and timely, which is highly regarded by our time constrained client base.Our Head Office is in London with offices in Chicago, Washington and Beijing, as well as an on the ground presence in other major financial centres across the world.