How property values impact economic growth

Here’s a breakdown of the minutes from that meeting and how different economic factors may affect the property market.

With respect to GDP and economic growth, the attendees noted that

The September quarter national accounts were released the day after the December meeting, with figures showing that growth in real GDP of 0.3 per cent in the quarter and 2.8 per cent over the year fell well below expectations
As a result of this, the RBA revised down its forecast for growth in the economy by one quarter of a percentage point for this year and next
The September quarter accounts also showed household consumption slowed by two and a half per cent
Inflation in the cost of new housing construction had trended lower, despite a high level of dwelling investment

These combined factors concerned members of the RBA board, noting that these may impact future household consumption which may in turn have an impact on the domestic economic outlook.

With respect to investments and property prices, the attendees noted that

Dwelling investment was likely to have been close to its peak in the second half of 2018
Although there’s still a large pipeline of residential work to be done, it had become more difficult for new apartment projects to obtain finance
Building approvals were the lowest they had been for five years

As a result, dwelling investment was expected to remain at a high level in the near term, but might decline faster than previously expected.

With respect to jobs and unemployment

Conditions in the labour market are currently strong
Employment continued to grow faster than the working-age population in the December quarter, with most of this growth in full-time employment
Above-average employment growth over the first half of 2019 is predicted
The unemployment rate has declined to 5 per cent, its lowest since 2011 and lower than predicted a year ago

The current low rates of unemployment are good indicators that there will not be a ‘crash’, but there is a chance that slowing consumer spending could impact jobs in the future.

With respect to inflation and impact on rentals

Inflation remained low in the December quarter
The members appear to have singled out Sydney and Perth in discussing rental properties; in Sydney, the rental vacancy rate has risen and is expected to rise further in the near term as more supply comes on the market. In both Sydney and Perth, advertised rents have fallen, although in Perth the pace of deflation has eased
In most states, rental vacancies are at or below where they were at the end of last year, suggesting supply and demand for housing is roughly balanced
In Melbourne, despite the fall in prices and large increase in supply, the vacancy rate had declined

In summary, rental prices have been subdued and are likely to stay this way in the near term.

With respect to the housing market generally:

After rising by almost 50 per cent over the five years to September 2017, national housing prices have fallen by around 8 per cent to be back around mid-2016 levels
Members noted the significantly different developments in housing prices around the country
Housing prices have fallen by 12 per cent in Sydney and by 9 per cent in Melbourne from their peaks in 2017
There had also been significant falls in housing prices in Perth and Darwin over recent years
By contrast, housing prices in Hobart and Canberra have increased while housing prices in Adelaide, Brisbane and many regional centres has been flat
Members noted that the cumulative falls in housing prices in Sydney and Melbourne were large by historical standards, and that it was unusual for housing prices to fall significantly in an environment of low mortgage interest rates and declining unemployment.

Members noted an explanation for the drop in values might be that supply in housing doesn’t always respond quickly to changes in demand. With rapid population growth not being matched by housing supply in the initial stages, prices increased. Then an increase in supply which took longer than previous cycles led to a decrease in demand. The other factor weighing on prices was a noticeable decline in demand from foreign buyers, something other countries (not just Australia) have noticed as well.

Lending

Housing credit growth has declined:

There has been a notable drop in loan approvals by the major banks
Growth in lending to investors has slowed sharply since mid-2017 to be close to zero
Growth in lending to owner-occupiers has moderated somewhat

Longer-term outlook

Following such large increases in housing prices, the effect of the recent price falls on overall economic activity was expected to be relatively small. However:

There was a general observation by the group that 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
From the positive (financial) stability perspective, tighter lending standards, an improving labour market and low interest rates were all likely to support households’ capacity to service their debt
Few households were in negative equity positions despite the falls in housing prices, implying that banks’ losses would be limited even if household financial stress were to become more widespread
Members noted that the sustained low level of interest rates over recent years has been supporting economic activity and had allowed for gradual progress to be made in reducing the unemployment rate and returning inflation towards the midpoint of the target.

Taking all of this into account, members of the meeting have taken the view that the current monetary policy is doing its job to keep unemployment and inflation low. Last year there was talk of both decreasing and increasing the cash rate, with an increase sounding more likely. That may not be the case now with both scenarios looking more evenly balanced at the present moment. While the RBA Board members continue to assess all economic matters, expect them to be watching housing prices carefully.