Finally! RBA board acknowledges housing market is neither subdued nor soft but declining

Finally! RBA board acknowledges housing market is neither subdued nor soft but declining
Finally! RBA board acknowledges housing market is neither subdued nor soft but declining

The publication of yesterday's monetary policy statement shows the Reserve Bank board appears to have finally gotten the message that the residential housing market is not just treading water but is actually in decline. 

Previous monetary policy statements have acknowledged that the housing market had declined in 2011, but appeared to skirt around the issue of falling house prices in 2012 with some ambiguous-sounding adjectives. 

In May the RBA suggested the housing market was “subdued” and in April the RBA said it was “soft”. 

However, finally in its June statement, the bank has come out and admitted that the market is fallen again in 2012. 

“Housing prices had shown some signs of stabilising around the turn of the year, but have recently declined again,” reads the June statement, though it could not resist adding: “Generally, the housing market remains subdued.” 

This change in perspective on the housing market was noted by Bill Evans, Westpac’s chief economist. 

“In May, house prices were described as 'stabilising', whereas one month on the governor chooses to point out that prices have 'recently declined again',” Evan said in a note following the June cash rate announcement. 

Perhaps taking note of the RBA’s acknowledgement of the decline in the housing sector this year, the Housing Industry Association (HIA) for once did not have an angry word to say about the central bank, reserving its testiness for the banks. 

The HIA press releasebegan with the back-patting headline: “RBA deserves a policy tick of approval for rate cut” and went on to say that the decision to cut rates would “help confidence and activity in residential construction and the wider domestic economy”. 

“Today’s rate cut sends a clear signal that the Reserve Bank is serious about two things: insulating the Australian economy from volatility in the world economy; and improving confidence and activity in the domestic economy,” says HIA senior economist Andrew Harvey.

Harvey says the attention now is on Australia’s banks, which have a “social obligation in such volatile times to pass through 100% of the official rate cut to businesses and households”.

However, others were quick to warn that the rate cut would not be a magic pill for the residential property market. 

Mark Courtney, Colliers International research director, says banks are unlikely to pass on the rate cut in full – “if they pass on any rate cut at all”. 

“Consequently, today’s RBA decision is likely to have only a minimal impact on the real estate sector,” he says. 

“For a greater impact, additional cuts are still needed. Ideally, the RBA will be looking to reduce the official cash rate by another 25 to 50 basis points over the next few months.” 

Paul Nugent, director at Wakelin Property Advisory, warned property market participants not to expect a dramatic reaction in the residential property market off the back of the June rate cut, “at least not in the coming weeks”. 

“There won’t be a massive jump in auction clearance rates and certainly not a spike in property prices. Instead, I anticipate the market to remain steady.

“The market is finely balanced. On one side it’s been held back by weak consumer confidence off the back of international economic uncertainty. On the other side, we have reasonable local economic conditions, lower interest rates, improved affordability, and a transparent market," he says. 

Nugent says that if the interest rate reduction cycle continues, “at some moment a tipping point will be reached when the economic and property fundamentals become so compelling that it will overcome the current inertia born from uncertainty”.

“Keep an eye on the gap between net rental yields and the standard variable mortgage rate. It is currently around 4%, which is its long-term average.  If this gap falls to 3% as a result of falling interest rates and steady-to-rising rents, that will be a green light signal that the property market is ‘good value.’  This may be the tipping point for a more sustained recovery,” he says.

Larry Schlesinger

Larry Schlesinger

Larry Schlesinger was a property writer at Property Observer

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