RBA’s worst nightmare could be playing out

The RBA’s worst-case scenario is that lower rates won’t lift the economy beyond fanning house prices. Picture: AAP

When the Reserve Bank cut its official benchmark rates in June and July, the first since 2016, policymakers knew there were risks.

The worst-case scenario being that the lower rates wouldn’t lift the economy beyond fanning house prices and making household debt, already a glaring vulnerability of the economy, much worse.

It is too soon to say the RBA has missed the mark, but there are reasons to be worried.

Data released on Monday revealed the number of housing ­finance agreements written by banks jumped 4.2 per cent in July, while the value of house loans being directed to property investors was up nearly 5 per cent over the month. The size of the increase surprised economists.

It also arrived faster than anticipated. The jump in financing comes as weekend housing auction markets have surged back to life, though supply remains low. House prices were also up in ­August, led by big gains in Sydney and Melbourne.

Despite huge debts, years of flat wages growth and strained affordability, it appears Australians retain a thirst for property ownership yet to be quenched.

Spring, the busiest period for the residential property market, has arrived, and market trends over the coming three or four months will be closely watched by a jittery RBA.

Should the property market’s revival gather momentum, the RBA will think long and hard about cutting interest rates further. But what happens if just house prices rise and the rest of the economy, which is growing at its slowest pace in a decade, remains flat?

“I think it would be a very challenging scenario for the RBA in 12 months when growth is still below trend, inflation still sub-target, the labour market is softer, but house prices are rising,” said Su-Lin Ong, chief eco­nomist at RBC Capital Markets.

Ms Ong doesn’t expect a recession, but sees potential for mediocre growth, with the RBA missing its inflation target and unemployment remaining elevated.

Data earlier on Tuesday showed that business isn’t yet seeing the stimulus that is now flowing to the property market.

National Australia Bank’s monthly business survey, which is a big part of the RBA’s own monitoring of corporate Australia, showed that conditions and confidence for companies were weaker in August.

Business conditions came in at their weakest level in five years. “Momentum in the business sector continues to slow, with profitability at its weakest level in more than five years and trading and forward orders also down,” said Catherine Birch, an economist at ANZ.

Looking ahead, there might be stronger GDP growth, but it may not be the kind of growth the RBA is after.

If the economy fails to respond to interest rate cuts beyond an effervescent housing market, greater attention will fall on the government to roll out fiscal stimulus.

So far, Canberra has indicated it is in watch-and-act mode, preferring to not delay the delivery of a promised 2019-20 budget surplus.

The Wall Street Journal