The downturn in the property market is “manageable” and will not impede economic growth, Reserve Bank governor Philip Lowe has said, despite some analysts accusing the central bank of “underestimating” its impact on GDP growth.
In an address on Wednesday (6 March), Mr Lowe noted the drivers of the recent slowdown in the housing market and the subsequent fall in dwelling values, citing the “inflexibility of the supply side of the housing market” in response to “large shifts in population growth”.
However, Mr Lowe stressed that the nature and timing of the imbalance varied across Australia, claiming that it is “clear” that there is “no such thing” as a single Australian housing market.
“What we have is a series of separate, but interconnected, markets,” he said.
The RBA governor went on to note that while shifts in population growth following the end of the mining boom affected property prices in Perth and Darwin, a decline in foreign investment activity and housing affordability pressures placed downward pressure on prices in Sydney and Melbourne.
According to the latest CoreLogic figures, price declines in Sydney, Melbourne, Perth and Darwin triggered a 6.3 per cent fall in national home values in the year to February 2019.
Despite acknowledging the link between falling home prices and the reduction in consumer spending (wealth effect), Mr Lowe remains confident that the slowdown would not serve as an impediment to overall economic growth.
“[The] adjustment in our housing market is manageable for the overall economy,” he said. “It is unlikely to derail our economic expansion.”
Mr Lowe added: “It will also have some positive side-effects by making housing more affordable for many people.”
With the official cash rate at a record-low of 1.5 per cent and the unemployment rate trending down, the RBA governor expressed confidence in the capacity for borrowers to service their loans.
“The national experience has been that low levels of unemployment and low interest rates allow most people to service their loans, even if weak income growth means that household finances are sometimes strained,” Mr Lowe continued.
“Our estimate is that, currently, less than 5 per cent of indebted owner-occupier households have negative equity, and the vast bulk of these households continue to meet their mortgage obligations.”
Mr Lowe added that the “substantial” reduction in the share of new loans with a high loan-to-value ratio (LVR) has helped ensure that fewer borrowers fall into negative equity.
However, some analysts, like AMP Capital’s chief economist Shane Oliver, believe the RBA has understated the downturn in the housing market and its effect on economic activity.
“Our view is that RBA is underestimating the impact of the housing downturn on the economy – particularly in terms of its impact on consumer spending – and as a consequence we still see weaker growth and lower inflation than the RBA is forecasting,” Mr Oliver said.
“Consistent with this we have seen a run of soft data this year and corporate profit results reflecting difficult conditions particularly around the housing and consumer sectors.”
Mr Oliver said that with the latest GDP data from the Australian Bureau of Statistics (ABS) reporting “subdued” 0.2 of a percentage point growth in the December quarter, public spending would not be enough to prevent a “per-capita recession”, referring to negative GDP growth over two consecutive quarters.
ABS chief economist Bruce Hockman attributed weak GDP growth to “soft” household spending, and a decline in dwelling investment, reflected in the latest dwelling approvals data, which he said suggests that the decline in dwelling investment will continue.
However, when outlining the RBA’s monetary policy expectations, Mr Lowe noted that changes in labour market conditions would guide the central bank’s outlook.
“Looking forward, a key issue is the labour market,” he said.
“Achieving full employment is an important objective in its own right. But, in addition, a strong labour market is the central ingredient in the expected pick-up in inflation.
“We are expecting that as the labour market tightens, wages growth will increase further. In turn, this should boost household income and spending and provide a counterweight to the fall in housing prices.”
Mr Lowe said that that he expects a pick-up in spending to put upward pressure on inflation.
“Of course, it is possible that inflation could move higher for other reasons, although the likelihood of this at the moment seems low,” he said. “This means that a lot depends upon the labour market.”