The Reserve Bank of Australia (RBA) continues to take the ‘wait and see’ approach, leaving the official April cash rate at 1.5%. Economists, on the other hand, are finding it difficult to agree on whether rate cuts or rises will happen in 2019.
CoreLogic RPData indicates that home prices fell nationally by 0.7% during February 2019 and dropped 6.8% since the market’s peak in October 2017. Currently, home prices sit at September 2016 levels. However, dwelling prices are still 18% higher than five years ago.
Regions that previously had growth are now noticing a decrease in housing value, despite these regions having a robust local economy. This fact highlights that tighter lending conditions are the main reason behind a fall in home values. Tighter lending decreases dwelling demand making it difficult for home sellers to achieve asking prices.
The number of homes advertised nationally is rising as there are fewer buyers in the market and longer selling times. But despite this, home inventory is significantly less than 12 months ago, down by 19%. This scenario suggests that buyer sentiment is low.
According to the Reserve Bank, housing credit grew by just 0.2% in January 2019, the weakest increase since 2015. Annual data indicates a 4.4% growth, the lowest ever recorded.
Credit conditions are continuing to tighten for both owner-occupiers and investors in the wake of the Royal Commission. Plus, many homebuyers have been forced to change from interest-only loans to principal and interest loans, reducing their cash flow. As a result, owner-occupier credit grew by 6.2% over 12 months; the lowest rate since September 2015. Investor credit, on the other hand, increased by just 1% over the same period.
Why is the RBA April cash rate staying on hold?
Significant uncertainties in forecasts suggest a rise in rates, others indicate a lowering to stabilise the economy. These forecasts though are far more evenly balanced than 12 months ago indicating that the economy needs more time to stabilise said the RBA.
For instance, employment is steady and the labour market favourable, with total employment increasing by over 2% in the last 12-months. Household consumption, on the other hand, is slowing as fewer homes spend on luxury items. However, spending on necessities remains the same.
This change in spending indicates that consumers are aware of changes in housing and other markets, which may affect their wealth. Consequently, households are reining in spending to ensure dwelling affordability remains consistent.
While established home prices continue to fall in Sydney, Melbourne and Perth, lending standards have also been tightened to reduce risk further. This strategy ensures banks and households remain resilient in times of change.
Why economists suggest a rate raise
Those economists suggesting that rates will rise do so as demand is building for workers – the creation of 250,000 jobs occurred in 2018 – highlighting business development and likely wage growth, giving households more disposable income. Predictions are that wage growth will reach 3.5% and be consistent with the rate of inflation.
The RBA has indicated that once the rate of inflation nears 2.5%, then they will seek to raise rates. At present inflation is still below 2%.
Why other economists suggest cutting rates
Economists who are indicating an RBA rate cut is likely are suggesting this because the national housing market continues to fall in value and household consumption is declining. Other indicators of economic sentiment typically include home affordability, wage growth, employment rates, living costs and levels of debt for households.
Home affordability is increasing as home prices fall. Therefore, the market is favourable for ‘first home buyers’ looking to purchase a property, providing they’ve saved a deposit, and have their finances in order.
Employment rates are also favourable, despite falling home values. February 2019 rates sit at 5.0%, a drop of 0.1% when compared to last month’s data.
However, wage growth is minimal at just 0.6%, while living costs and the household debt to income ratio rose by 0.5% and 28.6% respectively. These factors will all have an impact on the rate of inflation, which the Reserve Bank aims to keep around 3%. The current rate of inflation sits at just 1.8%, with predictions it could reach 2.5% by 2022.
Overall, financial experts indicate that while the Australian economy and home prices appear to be on rocky ground, the truth of the matter is both are in periods of adjustment and neither