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What’s the flow-on effect of the housing downturn?
A downturn in the housing market is reflected in a corresponding drain on individual consumers, the economy at large as well as inflation, the Reserve Bank of Australia’s deputy governor has explained.
What’s the flow-on effect of the housing downturn?
A downturn in the housing market is reflected in a corresponding drain on individual consumers, the economy at large as well as inflation, the Reserve Bank of Australia’s deputy governor has explained.
In a speech to the CFA Societies Australia Investment conference, Dr Guy Debelle outlined the impact that poor housing figures have on the economy at large.
Effect on inflation
The deputy governor said Australia’s falling inflation rate can largely be attributed to the falling household prices, particularly on the east coast.
He highlighted how consumers spend less as the price of dwellings fall.
“The decline in housing prices has also led to a fall in household wealth,” Dr Debelle said.
“Our standard estimate of the wealth effect is that a 10 per cent fall in housing prices leads to a 1.5 per cent fall in household consumption over time.”
Further, the two largest housing-related components of the consumer price index (CPI) basket are rents and new dwelling purchase by owner-occupiers, which together account for around one-sixth of consumer price calculations.
Inflation in these two components are reportedly at historical lows and reflect the conditions found in the housing market.
Dr Debelle also noted that as construction continues to experience downturn, with demand for new houses falling, developers are offering discounts in the ways of add-ons, which the ABS translates into a material reduction in the cost of detached housing in the CPI.
Housing prices
Dr Debelle noted that the downturn heralded the end of a long upswing in property values which first commenced back in 2012.
The economist indicated that he does anticipate the price of properties in Sydney and Melbourne to rise again as increases in demand continue to outpace increases in supply while credit remains low.
“Housing factors, including supply and demand in the housing prices, including population growth, housing income and rate of construction of new dwelling, have a greater impact on the property market than interest rate alone,” he said.
Dr Debelle indicated that the RBA is still “forecasting a further 7 per cent decline in dwelling investment over the next year, and there is some risk the decline could be even larger”.
“This will directly subtract around 1 percentage point from GDP growth from peak to trough, given that dwelling investment accounts for around 6 per cent of GDP,” he noted.
Lending conditions
Dr Debelle blames a lack of demand for new properties for the slump in credit growth and weak house prices, not the recent regulatory crackdown on loose lending standards.
“The slowdown in credit growth is primarily a demand story rather than a supply story,” Dr Debelle argued.
But, the low rates now available for lendees will lead to an increase in credit driven by borrowers looking to take advantage of historically low rates, he said.
“Loan approvals have begun to rise, but we have yet to see this flow through to a pick-up in housing credit growth, which has remained at historically low rates for both owner-occupiers and particularly investors,” Dr Debelle concluded.
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