UBS thinks the RBA is in 'rate cut territory' after the latest declines in Australian property values

Reserve Bank of Australia Governor Philip Lowe. Photo: Peter Parks / AFP / Getty Images.

Australia’s housing market is cooling, and the recent declines in price growth are consistent with levels at which the RBA has cut rates in the past, UBS says.

Monthly data from CoreLogic this morning showed growth in property values remained flat across the country in November.

It leaves annual price growth at 5.2%, which has now halved since hitting a recent peak of 10.4% in May 2017.

And UBS economists George Tharenou and Carlos Cacho noted that price growth on a six-month basis has been just 0.7%.

That’s important because over the last 30 years, “when house prices over a 6-month period weakened towards flat or negative, the RBA cut within a few months in 7 of 9 cycles”, the pair said.

So at current levels, the central bank is now in “rate cut territory”. The correlation is illustrated in the chart below:

The first of two occasions when the RBA didn’t cut rates amid falling house prices was in 1995 due to inflation fears, which saw rate cuts delayed until 1996.

The other was in 2004, when the onset of the mining boom saw GDP growth spike to to 4% — around double the growth seen in the June quarter.

Tharenou and Cacho noted the RBA’s mandate doesn’t include a target for house prices.

However, RBA Governor Philip Lowe has highlighted concerns around spiraling household debt-to-income ratios amid a low-interest rate environment.

Figures released by the RBA yesterday showed housing credit rose by 6.5% in October.

Governor Lowe has previously stated that annual growth in household debt of around 6% is sustainable, although UBS noted that at those levels it’s still more than three times higher than the current rate of Australian wage growth.

Tharenou recently called the top of the Australian housing market, signalling an end to the multi-decade boom which has seen cumulative price appreciation of 6,556%.

For now, UBS is maintaining its forecast of a “soft landing” in 2018, which will see price growth nationally of between 0-3%.

But despite the historical correlation with cooling house prices and rate cuts, Tharenou and Cacho said the RBA will be hesitant to cut further, given that official rates are already at historically low levels of 1.5%.

The bank is currently forecasting rates to stay on hold until Q4 2018 before rising.

However, the analysts said macro-prudential measures introduced this year to curb speculative borrowing would continue to have a lagged effect on the market.

The pair also cited the recent decline in auction clearance rates and dimming consumer sentiment towards housing, as leading indicators which suggest house prices could soften further.

In such a scenario, UBS expects the RBA will keep rates on hold through to 2019 but considers another rate cut unlikely.

For one thing, RBA Governor Lowe has recently indicated that the next move in interest rates is more likely to be up than down.

Before the central bank strongly considers another rate cut, the analysts said there would most likely have to be evidence of deterioration in the improving global growth outlook.

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