The Reserve Bank of Australia senior official stated that, despite apparent improvements in housing markets and potential for continued economic growth, Australia will not be able to achieve its inflationary targets in the near-term.
Duy Debelle, RBA Deputy Governor, addressed the CFA Societies Australia conference. He stated that housing construction remains a significant concern for the central bank.
He stated that “the typical lag between construction and sale of new homes suggests that the decline will continue for some time, in spite of recent stabilisation signs within the established housing markets.”
Australia’s residential sector accounts for about 6% of the country’s gross domestic product (GDP) and 2% of total employment. Debelle indicated that there is a possibility of a further 7% decline in dwelling investment next year. This could lead to a further slump, according to signs.
He said, “This will directly subtract approximately 1 percentage point GDP growth peak-to-trough.”
Debelle suggested that the recent downturn could also have an impact on consumption. The RBA estimates that a 10% decline in housing prices could cause a 1.5% drop of household consumption.
The downturn could have an effect on inflation, as new housing purchase and rents account approximately for one-sixth the basket consumer price indexes.
Are you expecting prices to rise?
In line with population growth, demand continues to rise. But, supply will need to catch up. This would lead to an increase in prices.
Debelle stated, “The growth in demand without a significant response from the supply will cause a greater price reaction.”
The RBA can’t seem to do much to stop a price rise, especially if it comes along with a “material increase in borrowing”.
Debelle stated that “Housing price increases clearly have a distributional effect, but monetary policies cannot be placed in place to address this.”
Over the past three months, house prices have risen sharply in Sydney, Melbourne, and other cities. Phillip Lowe (RBA Governor), recently said that rising house values wouldn’t be a problem if credit expands rapidly.
Debelle stated that the central banks will continue to be focused on the economy as well as the job market.
“Monetary policies aim to achieve aggregate outcomes in terms of unemployment and inflation. He said that unemployment is slightly higher now than it was at the beginning of the year, and wages have not been under any upward pressure. “The board decided that in the past months, they would relax their monetary policy. These actions reflect the expected evolution of the housing cycle, which I previously discussed.”
After cutting rates in July and June back-to-back the RBA decided to make a third rate cut earlier this month. Economists expect the central bank will reduce the cash rate by 0.5% by February.