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Australia c.bank research shows income, not just property weakness, key for policy

Published 21/03/2019, 04:38 pm
Updated 21/03/2019, 04:40 pm
Australia c.bank research shows income, not just property weakness, key for policy

Australia c.bank research shows income, not just property weakness, key for policy

By Swati Pandey

SYDNEY, March 21 (Reuters) - Australia's tumbling house prices would not necessarily translate into cuts in official interest rates if growth and inflation expectations remain strong, central bank research showed on Thursday.

While the report from the Reserve Bank of Australia (RBA) is not a policy outlook paper, it provides an insight into the research that shapes its views.

The paper also comes as the country's once high-flying property market nosedives and consumers in the A$1.9 trillion ($1.36 trillion) economy cut back on spending.

The article, which appeared in the RBA's monthly bulletin, said "a fall in housing prices would have fewer negative consequences if it was offset by other developments which meant that the overall economic outlook was positive and the unemployment rate was falling."

It also noted that "despite the fall in housing prices, interest rates may not need to be reduced as much to offset the effect of that price fall" if households and businesses expected strong growth and inflation in line with central bank targets.

The research noted the uncertainties related to estimating the effects of plunging property prices on household consumption. It identified a "positive and stable relationship" between household wealth and consumption, but that link somewhat broke when prices were in a downward spiral.

"A decline in household wealth is less likely to coincide with weaker consumption growth if it occurs at a time when the labour market is strong and household income growth is firm," the RBA's researchers noted.

The RBA has said previously the economy is entering "uncharted territories" as this housing downturn has occurred alongside record-low policy rates and solid jobs momentum.

Data out earlier in the day showed Australia's jobless rate fell to a near eight-year low of 4.9 percent as employment growth extended its dream run. there are questions over how much further unemployment could fall and how households would react to an extended downturn in the property market. Australia's housing stock is worth a cool A$6.68 trillion, but has fallen by A$280 billion since its peak in early 2018.

An increasing number of economists already expect a cut in the official cash rate from a record low of 1.50 percent this year, while financial markets are fully pricing in a policy easing as early as September 0#YIB: . RBA's modelling shows net wealth is not the sole determinant of consumption though. Household disposable income, the level of real interest rates, the unemployment rate and the economic performance also matter.

The RBA also looked at the effects of a prolonged fall in housing prices - an experience that Australia has not had in the past.

"The net effect of a fall in housing prices that occurs when broader macroeconomic conditions are positive might be only a small slowdown in the pace of economic activity," the RBA said.

"However, if the same fall in housing prices occurred alongside a broader slowdown in economic conditions, this could add to any case for an easing of monetary policy coming from the broader slowdown." ($1 = 1.3994 Australian dollars)

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