MNI INSIGHT: RBA Calm If Major City Home Price Falls Under 10%

--Declines Above 10% Or Spread More Widely Would Impact Outlook

By Sophia Rodrigues

     SYDNEY (MNI) - A fall in housing prices of up to 10% in major cities like

Sydney is unlikely to change the Reserve Bank of Australia's forecast of gradual

progress for economic growth and employment, as well as in inflation towards its

goal.

     Assuming there is no change in the RBA's other assumptions for the economy,

it means that the central bank's guidance - that the next move in the cash rate

will be higher - will continue to hold even if housing prices decline further.

     The RBA remains confident that a price fall of up to 10% can be managed in

the current cycle provided it is restricted to some cities and not the entire

country. The central bank has adopted a similar tolerance on previous occasions

when housing prices have declined in major cities but broadly within this 10%

parameter in the past two decades.

     It might be a different story, however, if the fall is more widespread or

exceeds 10%.

--WEAKENING PICTURE

     Housing prices have weakened in recent months mainly due to a decline in

prices in Sydney and more recently in Melbourne, resulting in the annual rate of

price growth slowing to +2.0% m/m in March nationally from +8.0% m/m in

September last year, according to the CoreLogic Home Value Index.

     The data shows prices in Sydney have fallen 3.9% so far from their peak in

July last year.

     At the RBA's April board meeting, there was a discussion on the housing

market which included a history of housing price falls of up to 10% in recent

years. This included a decline of up to 7% in Sydney prices in 2008 and again in

2004-06, and a 10% fall in Brisbane and Perth prices in recent years.

     The discussion took place in the context of the recent decline in housing

prices in the country's two main cities, Sydney and Melbourne, and what this

development could potentially mean for the economy.

     "Members noted that Sydney housing prices had declined by a little under 5%

since their peak in mid-2017. Members also noted that declines in housing prices

of around 10% in some cities had occurred several times over the preceding 15

years or so," the minutes of the April board meeting said.

     "Over recent months, housing prices had been little changed in Brisbane and

Perth," the minutes also observed.

     In the discussions on risks to the forecast in the February Statement on

Monetary Policy, the RBA said "if housing prices were to fall significantly,

households might respond by curtailing their consumption expenditure and

dwelling investment. Employment in the construction sector would also be

weaker."

     "Lower housing market activity would affect state government revenues,

which may affect decisions about expenditure on activities such as

infrastructure projects," the RBA's February Statement continued.

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

--MNI London Bureau; +44 203 865 3823; email: kevin.woodfield@marketnews.com

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