REPEAT: MNI: Broad Housing Downturn Risk To RBA MonPol Stance

Repeats Story Initially Transmitted at 09:10 GMT Aug 2/05:10 EST Aug 2

--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