Downturn could trigger cash-rate cut

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Australia’s housing downturn is intensifying, and more economists are expecting a rate cut from the Reserve Bank of Australia, according to a report by Business Insider Australia.

“House prices fell by more than in any month in December since the current downturn started and our sales-to-listing ratio fell to a fresh record-low,” Marcel Thieliant and Ben Udy, economists at Capital Economics, told the publication. “That suggests that prices will keep falling at a similar pace in the first half of this year.”

Capital Economics is forecasting that capital city home prices will drop 15% from their previous cyclical trough, marking the longest and deepest downturn recorded.

Given the data, Capital Economics is convinced that the central bank will lower its cash rate.

“We think that 2019 will be the year in which previous excesses in Australia’s housing market will catch up with the economy,” Thieliant and Udy said. “We believe that the deepening housing downturn will become a far bigger drag on Australia’s GDP growth than most anticipate. Rather than hiking interest rates as most anticipate, we think the Reserve Bank of Australia will have to respond by cutting interest rates later this year.”

Capital Economics predicted not one but two 25-basis-point rate cuts over the next 18 months, with one coming in the second half of this year and the other in the first half of 2020.

The research firm also said that falling home prices would add downside pressure on the economy despite the strength in external trade and government demand.

“Dwellings investment has held up so far because there’s a large pipeline of unfinished projects, but the plunge in building approvals suggests it will start to weaken soon. And households may start to curb consumption in response to falling housing wealth,” Thieliant and Udy said.

Net exports and public investment will remain supportive, but weakening consumption growth will likely impede the growth in business investment, they said.

RBA already said that it is hesitant to cut interest rates further and would rather keep policy rates steady in the hope that more robust market conditions will boost the GDP growth and wage growth, as well as push inflation to the midpoint of its 2-3% target.

This stand will likely have to change, though, according to Thieliant and Udy.

“The experience from housing downturns in other advanced economies is that central banks nearly always end up cutting policy rates,” they said.

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