RBA has uncertainty about the extent and speed of the downturn in dwelling investment cycle: February 2019 minutes

RBA members have noted their uncertainty about the extent and speed of the downturn in the dwelling investment cycle.

Dwelling investment was likely to have been close to its peak in the second half of 2018, the February minutes of the central bank advised.

"Although there was still a large pipeline of residential work to be done and few signs that projects already under way were being cancelled, it had become more difficult for new apartment projects to obtain finance, and 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 then to decline faster than previously expected."

From a longer-run perspective, the RBA members assessed that, 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, members observed 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 a 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 spent some time considering a paper on the implications of recent developments in housing markets for the economic outlook.

After rising by almost 50 percent over the five years to September 2017, national housing prices had fallen by around 8 per cent to be back around mid-2016 levels.

Members noted the significantly different developments in housing prices across the country.

Housing prices had fallen by 12 percent in Sydney and by 9 percent 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 had increased over 2018, while housing prices in Adelaide, Brisbane and many regional centres had been flat.

Members noted that the cumulative falls in housing prices in Sydney and Melbourne were relatively large by historical standards, and that it was unusual for housing prices to fall significantly in an environment of low mortgage interest rates and a declining unemployment rate.

Members noted that some of the dynamics in housing prices could be explained by the fact that the supply of housing does not respond quickly to changes in demand.

In particular, the run-up in housing prices had occurred during a period when housing supply had not picked up sufficiently to match higher demand from more rapid population growth.

Over time, higher housing prices had eventually led to a sizeable increase in supply, but this had taken longer than in previous cycles.

Another factor weighing on prices was a noticeable decline in demand from foreign buyers in recent years, which had also been apparent in housing markets in some other economies.

The RBA minutes noted rental vacancy rates are one key indicator of the balance of supply and demand in the housing market.

In most states, rental vacancies had been around or somewhat below average at the end of 2018, suggesting supply and demand for housing had been roughly balanced.

In Melbourne, despite the fall in prices and large increase in supply, the vacancy rate had declined.

By contrast, rental vacancies in Sydney had been increasing and advertised rents had fallen.

Members also noted that housing credit growth had declined further in preceding months and that there had been a notable drop in loan approvals by the major banks.

Growth in lending to investors had slowed sharply since mid 2017 to be close to zero, while growth in lending to owner-occupiers had moderated to around 5½ per cent in six-month-ended annualised terms.

The slower growth in lending for housing over the preceding year appeared to reflect weaker demand, the minutes advised.

"Nevertheless, credit conditions for some borrowers had remained tighter than they had been for some time following the strengthening of lending policies and practices over recent years.

"Liaison with mortgage brokers suggested that the increased public scrutiny associated with the Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry may have led some individual loan assessors at banks to apply stricter criteria than specified in official lending requirements.

"However, banks reported that while loan assessors had been referring more approvals to credit officers, final loan approval rates had remained high.

"Moreover, lenders had continued to compete for borrowers of high credit quality by offering new loans at lower interest rates than those offered on existing loans."

To read the full minutes, click here.