Finance Finance News Rising house prices good for economy: RBA

Rising house prices good for economy: RBA

home property high rise
In the July to September quarter the medium unit rent lodged with the bond board was $525 a week. Photo: Shutterstock
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Property investors are dominating the housing market, but at least rising house prices are encouraging people to spend more money, the Reserve Bank says.

The central bank appears less concerned than it has been in recent months about the growth in dwelling investment, when it flagged regulations to curb investor activity in the housing market.

In the minutes of its November board meeting, released on Tuesday, the RBA said property investment growth remained strong and although house price growth had slowed from last year’s rapid pace, prices were still high in Sydney and Melbourne.

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The RBA said rising house prices were adding to household wealth at a time when wages were growing slowly, encouraging people to spend more money.

“Members noted that the strength in the housing market was expected to give some support to household consumption in the near term as rising housing valuations allowed some credit-constrained home owners to bring forward their consumption,” the RBA said.

“The pickup in retail sales in the September quarter and stronger growth in retail sales in those states with more rapid housing price growth was consistent with this view.”

The RBA said growth in mortgages to property investors had continued “at a noticeably faster rate” than credit to owner-occupiers, with no signs that dwelling investment growth would slow in coming quarters.

It said low interest rates and ongoing population growth would continue to support growth in housing activity and the established housing market.

“This was expected to spur activity in other areas of the economy through the usual channels,” the RBA said.

In order to continue stimulating demand, the RBA decided to leave the cash rate at the record low of 2.5 per cent on November 4.

“Members considered that the most prudent course was likely to be a period of stability in interest rates,” the RBA said.

Sluggish growth for 2014/15

The RBA expects below-trend economic growth over 2014/15 and no above-trend growth until late 2016, implying a bleak outlook for jobseekers.

Interest rates have to be held low to encourage economic growth to accelerate to a pace likely to stop unemployment rising – what’s known as the trend rate of growth – and then to the above-trend pace that’s needed to bring unemployment down.

“GDP (gross domestic product) growth was still expected to be below trend over 2014/15, before gradually picking up to an above-trend pace towards the end of 2016,” the RBA said in the minutes.

We are now in late 2014, so late 2016 is still two years, or 730 days, away.

And employment responds to changes in economic growth with a delay, so the RBA’s forecasts still imply a dreary outlook for jobseekers, with probably no significant decline in unemployment until 2017.

Dollar still overvalued

The RBA also repeated its mantra that the Aussie dollar remains overvalued, despite a fall in commodity prices since January.

The Australian dollar was trading at 87.24 US cents at 1140 AEDT, up from 87.11 US cents shortly before the release of the RBA’s minutes.

“Despite the recent appreciation of the exchange rate, the Australian dollar remained above most estimates of its fundamental value, particularly given the further declines in key commodity prices over the course of the year to date,” the RBA said.

“As a result, the exchange rate was offering less assistance than would normally be expected in achieving balanced growth in the economy.”


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