Dropping prices weaken RBA's confidence in the economy

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Declining property prices caused uncertainty in household consumption, leading to a disruption in the country’s economic growth.

According to a report by Bloomberg, dropping values are beginning to “overshadow” Reserve Bank of Australia (RBA) Governor Philip Lowe’s initial scenario of a sustained increase in prices, which would tighten the labour market and slowly drive inflation upwards.

The downturn is likely to worsen, with Sydney’s market declining 10% and banks pulling away from lending due to increased scrutiny.

“The outlook for household consumption continued to be a source of uncertainty because growth in household income remained low, debt levels were high and housing prices had declined. Members noted that this combination of factors posed downside risks,” the RBA said during its last policy meeting for the year.

Through a liaison with developers, the RBA also found that demand for new housing in eastern Australia had eased. Some developers reported that this weakening demand had become more evident. The demand for off-the-plan apartments had slid significantly since mid-2017.

Bill Evans, chief economist at Westpac Banking Corp, said that the minutes of the meeting implied the central bank’s reduced confidence in the economy.

“Taking into account the attention given to the credit, housing, consumer and external risks, these minutes should be interpreted more dovishly than we have seen over the course of 2018,” Evans said.

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