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RBA downplays economic effect of house price slide

Glenn Freeman with AAP  |  06 Mar 2019Text size  Decrease  Increase  |  
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Reserve Bank governor Philip Lowe has urged banks to loosen the purse strings on mortgage credit, saying the housing downturn is unlikely to end Australia's 27-year run without a recession.

Dr Lowe said on Wednesday that the ongoing decline in property values, which is most marked in Sydney and Melbourne, was a manageable correction following supercharged growth between 2012 and 2017.

His remarks coincided with data showing the Australian economy grew by a "subdued" 2.3 per cent in 2018 after restrained consumer spending and a faltering housing market contributed to a below expectation December quarter.

The Australian Bureau of Statistics data showed the economy grew by 0.2 per cent in the three months to 31 December, missing consensus forecasts and falling short of the RBA's downgraded full-year growth target of 2.75 per cent.

Dr Lowe said many lenders have become too risk adverse in cutting back on home loan availability.

"Credit conditions tightened more than was probably required," Dr Lowe told the Australian Financial Review Business Summit in Sydney.

"It is important that banks are prepared to take credit risk, and it's important that they have the capacity to manage that risk well. If they can't do this, then the economy will suffer."

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The RBA anticipates continued slowing in Sydney and Melbourne house prices, and therefore ongoing uncertainty around consumer spending.

"But it still sees the global outlook as being reasonable … and the labour market as strong, and expects to see some lift in wages growth," says AMP chief economist, Shane Oliver.

This view has kept the RBA from joining many economists in believing the cash rate needs to be cut from an all-time low of 1.5 per cent in order to stimulate consumer spending.

But AMP's Oliver believes the RBA is underestimating the impact of the housing downturn on the economy.

"Particularly in terms of its impact on consumer spending – and as a consequence we still see weaker growth and lower inflation than the RBA is forecasting.

"We have seen a run of soft data this year and corporate profit results reflecting difficult conditions, particularly around the housing and consumer sectors," Oliver says.

"This should provide a counterweight to the effect on spending of lower housing prices."

Dr Lowe reiterated that the RBA remained neutral on the cash rate, claiming 1.5 per cent - in place since August 2016 and confirmed on Tuesday - was "clearly stimulatory" and "supporting the creation of jobs".

The ABS data also showed household final consumption expenditure rose 0.4 per cent during the quarter, the third time in a year it has been 0.4 per cent or lower.

Government final consumption expenditure rose 1.8 per cent and contributed 0.3 percentage points to quarterly GDP growth.

The Australian dollar dropped to a two-month low of 70.52 US cents, from 70.88 US cents just before the data was released at 11.30am.

. Glenn Freeman is senior editor, Morningstar Australia.

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