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RBA Sees Risk of Property-Price Spike as House-Building Dwindles

Michael Heath

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Australia’s central bank said there’s potential for an upswing in home prices as dwelling construction weakens, while reiterating it’s prepared to lower interest rates further.

In minutes of its Sept. 3 policy meeting released in Sydney Tuesday, the Reserve Bank also noted that “the upward trend in wages growth appeared to have stalled” and that forward-looking indicators suggested employment growth would moderate over the next six months. It kept the cash rate unchanged at 1% after back-to-back cuts in June and July.

Policy makers reaffirmed that they see an “extended period” of low rates and will ease further “if needed” to support sustainable economic growth and faster inflation. The RBA noted positive investment intentions for mining in the 12 months through June 2020, modestly lower plans for non-mining industries and a “particularly weak” outlook for construction.

“There was likely to be further weakness in dwelling investment in the near term,” the RBA said. “Members recognized that this could sow the seeds of an upswing in the housing price cycle at some point, particularly given the lengthy stages in the construction of higher-density residential housing.”

Since the two rate cuts and an easing of lending restrictions, property prices in Sydney and Melbourne have been resurgent. Policy makers are hoping this will generate a wealth effect that encourages consumers to resume spending, particularly as a government cash rebate is being transferred to households.

“However, the bank’s liaison with retailers suggested that this had yet to lift spending noticeably,” the minutes said. The bank noted that even if the cash “was used to pay off debts, this would still bring forward the point at which households could increase their spending.”

Australian household debt is at a record-high and this is being compounded by weak wages growth.

The minutes also showed members had a “detailed discussion” of the ways in which financial conditions abroad affect Australia. The board noted that Australia’s floating exchange rate -- currently near its lowest in some years -- meant policy could be set according to domestic conditions.

More Uncertainty

At an international level, the RBA expects trade will remain weak for some time and noted that heightened geopolitical uncertainty -- the U.S.-China trade war, Brexit and Europe -- had contributed to lower growth and investment in many economies.

Australian firms didn’t seem to have been affected by the weak trade environment as much as counterparts in other advanced economies, the minutes said, pointing out Australian companies are more geared to China’s domestic demand and less integrated in global supply chains.

Still, the bank reiterated that “it was reasonable to expect that an extended period of low interest rates would be required,” the minutes showed. “Members would assess developments in both the international and domestic economies, including labor market conditions, and would ease monetary policy further if needed to support sustainable growth in the economy and the achievement of the inflation target over time.”

The RBA targets inflation of 2-3% and has struggled to reach that target for almost five years.

To contact the reporter on this story: Michael Heath in Sydney at mheath1@bloomberg.net

To contact the editors responsible for this story: Nasreen Seria at nseria@bloomberg.net, Chris Bourke, Victoria Batchelor

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