The Australian housing market will continue to correct in 2019, according to CoreLogic – Moody’s Analytics. Sydney and Melbourne should lead the falls given that those cities benefited from the ramp up in prices over the last 5 years, leaving other cities less affected by the falls. Sydney housing market is expected to fall 3.3% in 2019, and Melbourne is expected to fall 6%, with the inner city areas affected the most.
The M1 money supply figures have been mirroring the house price trends, with M1 figures published on 31st December by the RBA showing M1 annual growth moving lower to negative 2.1%. Rising home prices needs credit growth feeding into money supply growth to maintain the higher prices. All measures appear to be in decline.
Moody’s point out that the Australian economy is cruising around its potential, there is near full employment, wage growth is slowly rising, and GDP growth is a respectable 2.7% to 3%. But the cooling housing market appears to be making Australians feel less wealthy and more cautious in a feedback loop that is causing further caution. The Australian economy is too dependent on the housing market, such that any pullback flows quickly into other sectors of the economy. Fortunately, there is Public Investment into major infrastructure projects across the country. Again though, State Governments have marked down their stamp duty receipts from home purchases by $12 Billion. This may dampen new infrastructure spending unless the State Governments start running deficits.
The report mentioned that the greatest drag on the third quarter national accounts was a slowdown in household consumption. The ASX consumer discretionary sector declined by 10.7% in 2018, mirroring the growing caution of the consumer. Households also had to contend with increases in mortgage interest rates that was independent of the RBA cash rate.
Overall, Moody’s point out, the macroeconomic outlook looks favourable, with GDP expected to maintain steady growth. Unfortunately, interest rates are at their lowest for many decades, and should our economy suffer from a broader economic shock, there is not much room left to move on interest rates. Even if the RBA dropped interest rates by .50%, it would be likely that the banks would retain a good proportion of the rate cut. The 90-day bank bill rate is already 2.06%, which is .56% above the RBA cash rate. Should the economy slow, the bank funding costs would probably rise further. In short, there is not much stimulation left for the consumer should the RBA cut interest rates. The consumer is probably right to be cautious.