MNI INSIGHT: RBA Alert to Risk of Sharp Housing Price Slowdown

--RBA Keen to Understand Upgraded CoreLogic Home Value Index

By Sophia Rodrigues

     SYDNEY (MNI) - Housing market conditions have eased in Australia in recent

months but it's not all good news from the Reserve Bank of Australia's

perspective because of worries that any sharp slowing in housing prices would

hurt household spending prospects.

     In its September cash rate statement, the RBA made specific mention of the

easing in housing prices in Sydney in a sign that it is watching this trend

closely. The comment followed the release of the CoreLogic home value index for

August, which showed dwelling values in Sydney were flat m/m in August, and rose

just 0.3% q/q, though the annual gain was still strong at 13.0%.

     A slowing in Sydney prices was the main contributor to flat growth for

national dwelling values in August, with the combined values for the eight

capital cities slowing to just +0.1% m/m and +0.6% q/q from +1.5% m/m and +2.2%

q/q in July.

     One factor causing the sharp slowing in August may be updated methodologies

and processes used by Corelogic to calculate the index. Still, the sharp slowing

appears to have caught the RBA by surprise, with officials now trying to

understand the upgraded index and what the new data are telling them.

     For the RBA it is important to understand this trend because of the risk

that a sharply slowdown in house prices now could mean a much larger fall when

additional housing supply already under construction enters the market.

     To be sure, the RBA is not seeking a rapid rise in housing prices; to be

more specific, the central bank isn't targeting housing prices. But it is alert

to the risk of sharp slowing because the economic growth has not advanced to a

stage where it can afford weaker household consumption. 

     In fact, household consumption was a key risk cited by the RBA in its

August Statement on Monetary Policy. In September, the RBA said "retail sales

have picked up recently, although slow growth in real wages and high levels of

household debt are likely to constrain future growth in spending."

     Rising wealth through rising housing prices is one of the key drivers of

household spending and any fall in house prices raises the risk that households

would cut their consumption sharply. The RBA is well aware that the potential

cutback in consumption when households see wealth and income slowing is far

greater than the increase in spending when both are on an uptrend.

     In some ways, the RBA is expecting a Goldilocks scenario under which it

doesn't want to see household debt levels go up but also doesn't want housing

prices to go down. And it is probably aware that this  scenario is difficult to

achieve but is important for the economy's growth prospects.

     This is one reason the RBA has consistently said that the macro-prudential

measures in the housing market enacted by regulators, including the Australian

Prudential Regulation Authority, are not aimed at housing prices.

     Even APRA chairman Wayne Bryes has echoed the same comments. In a recent

speech last week, Bryes said "APRA's supervision isn't about managing conditions

in the housing market or house prices; we have a simpler goal of ensuring that

core standards stand up to scrutiny, both in policy and in practice."

--MNI Sydney Bureau; tel: +61 2-9716-5467; email: sophia.rodrigues@marketnews.com

--MNI BEIJING Bureau; +1 202-371-2121; email: john.carter@mni-news.com

--MNI Beijing Bureau; +86 (10) 8532-5998; email: vince.morkri@marketnews.com

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