MNI INSIGHT: Firmer Housing Market Could Shorten RBA Easing

By Lachlan Colquhoun

     SYDNEY(MNI) - The Reserve Bank of Australia is increasingly confident the

property market has bottomed out, which could make the Bank's easing cycle

shorter than it had previously considered possible, MNI understands.

     Two consecutive cuts by the RBA, in June and July, have taken official

interest rates to a record low 1%, while prudential regulator APRA has also

scrapped serviceability restrictions introduced during the housing boom.

     With mortgage lenders largely passing on the cuts and able to lend more

under the serviceability regime, there are signs the slump, which saw median

house prices in the key Melbourne and Sydney markets fall by up to 14% from 2017

peaks, has bottomed out.

     House prices in Australia's two largest cities rose in June for the first

time in two years, by a marginal 0.1% and 0.2% respectively, enough to persuade

the RBA the market is firming.

     The RBA has said more cuts could be required to stimulate the economy, but

sees the housing market as crucial to consumer confidence.

     If consumer spending were to rally as housing firms, this could have a

positive impact on the labour market and wages growth, both key to the Bank's

policy outlook.

     The returned Coalition Government in Canberra has also passed legislation

for A$158 billion in personal tax cuts, giving an immediate rebate of A$1,080

each to lower and middle income earners.

     While MNI understands the RBA would like the government to be more active

in stimulating the economy through structural reform and infrastructure

spending, the Bank is also factoring the tax cuts into a more positive scenario.

     While renewed housing market optimism is unlikely to change the RBA's

immediate outlook, which is that another rate cut may be required in the short

or medium term, if it leads to the economy bottoming out then the easing cycle

could be shorter than previously thought.

     RBA Governor Philip Lowe will deliver a major speech this week on inflation

targeting, in which he is expected to defend the Bank's 2% to 3% target range.

Inflation is currently running at 1.3%.

     While the Bank is committed to its target, it sees inflation as secondary

to bringing unemployment down from 5.2% and reducing underemployment of 8.2%.

     The housing market has long been a measure of economic activity in

Australia, providing both confidence and driving sales of household-related

items and services.

--MNI London Bureau; +44 203 865 3829; email: jason.webb@marketnews.com

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