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Australia growth to be hit by housing 'perfect storm'

Property prices expected to drop a further 10% next year; RBA likely to cut interest rates in H2 2019

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The downturn in Sydney, Australia's most populous city, is accelerating as tighter mortgage lending standards crimp the amount people can borrow and as nervous buyers sit on the sidelines.

Sydney

AUSTRALIA'S tumbling property prices could shave up to 1.2 percentage points from economic growth in 2019 as the decline hits housing construction and consumer spending, according to AMP Capital Investors.

Prices will drop a further 10 per cent next year, taking their peak-to-trough fall to 20 per cent as a "prefect storm" smacks housing, AMP's chief economist Shane Oliver said in a research report on Wednesday.

He predicts the Reserve Bank of Australia will cut interest rates in the second half of 2019 and end the year with a cash rate at 1 per cent from the current 1.5 per cent.

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"The positive feedback loop of recent years of rising prices bringing higher demand and further price gains has given way to a negative feedback loop of falling prices leading to reduced demand and further declines," Mr Oliver said of housing. "This could all be made worse if immigration levels are cut sharply."

Sydney's property market slump has reached a new milestone, with values falling further than the late 1980s when Australia was on the cusp of entering its last recession. The downturn in Australia's most populous city is accelerating as tighter mortgage lending standards crimp the amount people can borrow and as nervous buyers sit on the sidelines.

Mr Oliver said while the price falls in Australia are not on the scale of the property crashes in the US and Europe during the 2008 global financial crisis, the property downturn "will have a significant economic impact" Down Under:

  • A direct detraction from economic growth as the housing construction cycle turns down about 0.4 percentage point a year (the average it added during the construction boom).
  • Reduced demand for household equipment as dwelling completions top out and decline.
  • A negative wealth effect on consumer spending of around 1 per cent per annum. Mr Oliver noted that rising housing wealth had helped drive growth in consumer spending in Sydney and Melbourne as households cut the amount they save. This is now likely to go into reverse, detracting around 0.6 percentage point from GDP growth.
  • There could also be a feedback loop into further bank credit tightening if non-performing loans and defaults rise.
  • Taken together, he estimated these factors could detract 1-1.2 percentage points from GDP growth over the next year.

"Rate cuts won't be aimed at re-inflating the property market but supporting households with a mortgage to offset the negative wealth impact on spending," Mr Oliver said, estimating a quarter-point cut would save a household with a A$400,000 mortgage about A$1,000 a year.

"Banks will likely have no choice to pass the cuts on given the bad publicity not passing them on will generate." BLOOMBERG