Reserve Bank Australia emphasises the importance of house prices

The policy outlook is firmly linked to progress in reducing the unemployment rate and moving the inflation rate back into the 2-3% policy band.

The risks around the outlook centre on the household sector and dwelling investment. The Bank remains generally comfortable with the outlook for business investment; government spending and external conditions.

Clearly, developments in the housing market, particularly in Sydney and Melbourne, are attracting considerably more attention than we had seen in the minutes of meetings held in 2018. In particular, the Bank’s current position that the effect of recent price falls on overall economic activity was expected to be relatively small is noted.

However, in a very significant warning around the policy outlook, the minutes state “if prices were to fall much further, consumption could be weaker than forecast, which would result in lower GDP growth, higher unemployment and lower inflation than forecast”. This statement directly links developments in house prices to the Bank’s key policy forecasts.

The causal mechanism would be around a larger wealth effect than currently expected impacting consumer spending, and a sharper The RBA’s handle on the outlook for housing prices in Sydney and Melbourne appears tenuous. The minutes note that the recent falls “were relatively large by historical standards, and that was unusual for housing prices to fall significantly in an environment of low mortgage interest rates and a declining unemployment rate”.

Note that in previous periods of falling house prices, large interest rate cuts have followed, and were successful in stabilising the markets. downturn in residential building activity than has been recognised, even in the Bank’s new much more subdued forecasts relative to the November Statement on Monetary Policy.

The current period of low mortgage rates means that the usual policy response to stabilise markets with large rate cuts will not be possible, and it is therefore not unreasonable to expect that further falls in house prices may occur.

Based on the comments in these minutes, such an outcome is likely to lead to further downward revisions in the RBA’s forecasts.


The minutes note that financial market pricing implied that the Australian cash rate was expected to remain unchanged for a considerable period with some expectation of a decrease by late 2019.

Westpac forecasts remain lower than those of the RBA and Westpac therefore expect that, over time, the RBA will further revise down their forecasts.

However, Westpac does not think that those downward revisions will be sufficient to trigger a rate cut. As usual, bank’s forecasts will continue to be reviewed.

*souce Property Observer / Bill Evans

Posted in Buy, News, Rent on 20th February, 2019