A SYDNEY property price recovery could be just one or two cash rate cuts away.
That’s a real possibility based on the latest research of, no-less, the Reserve Bank of Australia.
Their researchers found falling interest rates was the chief catalyst behind the huge surge in prices between 2012 and 2017.
“We find that low interest rates explain much of the rapid growth in housing prices and construction over the past few years,” RBA economist Trent Saunders and RBA senior research manager Peter Tulip noted.
Their modelling of the Australian housing market sought to quantify the interrelationships between prices, rents, construction and vacancies.
They ignored minor variables like taxes, lending restrictions and first homeowner grants.
They found the building boom seen in recent years would not have been as pronounced were it not for the lower borrowing costs and higher prices prompting a supply response from developers.
Another demand factor, high immigration, helped explain the tight housing market and rapid growth in rents.
“The model estimates that the reduction in real interest rates (actual interest rates, less inflation) accounts for most of the boom in dwelling prices and a large part of the boom in dwelling investment,” said the researchers in their 35-page report.
It is not the official view of the board that sits in judgment on the first Tuesday of the month, but the insights are going to shape the timing and speed of any next move in the cash rate.
The speculation of the much anticipated 2019 rate cut only hit the mainstream market commentary earlier this year when Shane Oliver, the chief economist at AMP Capital, raised the prospect.
Oliver noted home price weakness was at levels where the RBA started cutting rates in 2008 and 2011 and the 2015-16 property slowdown was also turned around by rate cuts in May and August 2016. “Ongoing home price falls in Sydney and Melbourne will depress consumer spending as the wealth effect goes in reverse and so homeowners will be less inclined to allow their savings rate to decline,” Oliver noted.
Bill Evans at Westpac chimed in last month expecting the Reserve Bank to cut the cash rate by 25 bps in both August and November this year.
Evans noted headwinds for the housing market and activity were also apparent in developments around credit.
Evans noted there was less lending demand and supply, after concerns around falling prices and stretched affordability and lending supply being hit by new regulations and caution from some lenders in a falling market. Evans does not expect that these two cuts would immediately stabilise housing markets.
Last week NAB’s chief economist Alan Oster said the RBA outlook for a further fall in unemployment to gradually lift wages and ultimately inflation was increasingly in doubt.
He therefore expects the RBA to provide some further support to the economy in the form of lower interest rates. Oster anticipates in July and November.
While the informative RBA research will contribute to the commentary, there’s little risk that home prices will rise rapidly as they just did. The introduction of tougher lending standards towards household expenses and outstanding debt held by borrowers ought make sure of this.