It’s not falling house prices but weak wage growth that could derail the economy.
That’s the view of Reserve Bank of Australia governor Philip Lowe, who has moved to allay fears of economic fallout from the property market and lower house prices.
In an address to the Australian Financial Review Business Summit on Wednesday, Lowe said it’s “unlikely” the fall in house prices will derail Australia’s economic expansion.
The comments come as The Australian economics editor and Your Money contributor Adam Creighton has written that the RBA is “increasingly isolated” among economists with its decision to ignore the house price slump.
But Lowe seems unperturbed by the commentary, looking to history and previous plummets in the housing market.
In the five years leading up to late 2017, house prices across the country increased by almost 50 per cent. Since their peak, prices have retracted by 9 per cent, bringing values back to mid-2016 levels.
“Declines of this magnitude are unusual but not unprecedented,” Lowe said. “In 2008 and 2010, prices fell by a similar amount, as they did in the 1980s.
“[In] inflation-adjusted terms, the declines in the 1980s were larger than the declines we are currently witnessing.”
Australians are obsessed with real estate and house prices, Lowe said, possibly more so than any other country in the world.
But it’s not house prices but low wage growth and its effect on our economy that we should be worried about.
Weak income growth has persisted for a number of years and it’s an issue that’s “become harder to ignore.”
“Expectations of future income growth have been revised down and it’s likely that this is affecting spending in the economy now,” Lowe said.
Weak growth in household income has led people to save more and spend less.
“Swings in housing prices and turnover in the housing market are also having an effect (on consumption decisions), but they are not the main issue here.
“Over recent years, households have been injecting very substantial equity into housing and they have not been using higher housing prices to borrow to support their other spending.”
However, recent labour data has been encouraging, Lowe said.
“A further tightening in the labour market is expected to see a gradual increase in wages growth and faster income growth.
“This should provide a counterweight to the effect on spending of lower housing prices.
“The adjustment we are seeing in the housing market is manageable for the overall economy,” Lowe concluded.
Lowe noted the positive side effects of lower house prices, including making housing more affordable for many people.
“First homeowners find it easier to buy a home. Investors are attracted back into the market by the higher yields and trade-up buyers take the opportunity to upgrade to the home they’ve always wanted,” he said.
Why house prices fell in the first place
Lowe said the origins of the current housing decline were not due to low-interest rates or unemployment levels, but instead that supply could not catch up to demand driven by higher population growth.
“The inflexibility in the supply side of the housing market in response to large shifts in population growth.
“Australian population growth picked up in the mid-2000s but it took the better part of a decade for home building to respond to this,” Lowe said.
Will rates lift by the end of the year?
The RBA left interest rates on hold at its historic low of 1.5 per cent on Tuesday.
Despite widespread speculation that the RBA may lift rates by the end of the year, Lowe revealed the central bank’s position.
“It’s hard to think of a scenario where interest rates would go up this year.
“Inflation pressures are very benign. Wage growth remains low and the current rate of wage growth is unlikely to generate an inflation rate of 2.5 per cent,” he said.