RBA says falling house prices ‘unlikely’ to derail the economy

The impact of falling housing prices will be outweighed by lower unemployment and rising wages, the RBA believes.

Governor of the RBA Philip Lowe says the outlook for interest rates is “reasonably evenly balanced”. Pic: AAP

Falling house prices are “manageable” and “unlikely to derail” the economy, as negative wealth effects will be outweighed by positive income effects from falling unemployment and rising wages, reinforcing a steady outlook for interest rates, according to the Reserve Bank of Australia.

RBA governor Philip Lowe today reasserted the central bank’s position that the outlook for interest rates is “reasonably evenly balanced”, with trends in the labour market, inflation and household spending key considerations for policy makers, but a further tightening of the labour market is expected to see a gradual increase in wages growth and faster income growth.

“This should provide a counterweight to the effect on spending of lower housing prices,” he said in a speech to a business summit just two hours before the release of weaker than expected GDP growth figures.

Dr Lowe said the RBA will continue to assess the shifts in the global economy, trends in household spending and how the “tension between the labour market and output indicators resolves itself”.

“Given these various cross currents, the board’s judgment remains that the most appropriate course is to maintain the cash rate at its current level,” he said.

The RBA has “flexibility to adjust monetary policy in either direction as required”.

But “at the moment, the probabilities (on interest rates) appear reasonably evenly balanced.”

However while his comments affirm the policy bias adopted by the RBA a month ago, Dr Lowe also appeared more concerned about the pace of economic growth, saying the economy “clearly” slowed in late 2018.

Yet he maintained that the current cash rate of 1.5 per cent is “clearly stimulatory”.

“It is supporting the creation of jobs and progress towards achieving the inflation target,” he said.

Still, Dr Lowe noted that in a number of countries, including Australia, there is “growing tension between strong labour market data and softer GDP data.”

“We are devoting significant resources to understanding this tension,” he added.

GDP growth data for the fourth quarter of 2018 showed the economy grew by a weaker than expected 0.2 per cent in the December quarter and 2.3 per cent on-year.

The RBA has left its cash rate target at a record-low 1.5 per cent since mid-2016, betting the stimulus to the economy will eventually lift wages and inflation.

That process has proven painfully slow, albeit there have been recent signs that wages are starting to rise.

Still, with GDP growth slowing, there is a cloud over the outlook for employment growth. The job market remains strong, but some economists warn it could be a lagging a downturn in the economy, with unemployment set to rise in 2019.

Dr Lowe’s speech was devoted mostly to the issue of a softening housing market and the impact it is going to have on consumer spending.

A falling unemployment rate will likely bring higher wages, countering a lot of the pressure being exerted on consumer spending by falling house prices, Dr Lowe said.

Asked whether he hoped his signalling to the housing market that he won’t lift interest rates in the short term would push a “cushion” under the house price fall to support consumption, Dr Lowe said: “The signalling of a neutral stance on monetary policy isn’t to try and support the housing market.

“It’s really a reflection of the circumstances we face, but what we do see in the housing market recently is an increasing number of people saying it’s a reasonable time to buy a house.”

House prices in Australia have been falling since mid-2017, with the major state capitals of Sydney and Melbourne leading the retreat.

Some forecasters expect the peak-to-trough fall in Sydney house prices will be close to 20 per cent, if not more.

The fall in house prices wasn’t an issue of financial viability for banks, Dr Lowe added.

“We have not experienced the very loose lending practices that were common in the US before the housing crash there a decade ago. Nor have we seen significant over building around the country,” he added.

With Dow Jones Newswires