Australia's housing downturn a larger-than-expected drag on economy

Reuters

Published Oct 16, 2019 06:52PM ET

Australia's housing downturn a larger-than-expected drag on economy

SYDNEY (Reuters) - Australia's property downturn is hitting household consumption and is a big drag on economic growth and inflation that will likely last at least another year, despite three interest rate cuts, a senior central bank official said on Thursday.

However, an uptick in home prices in recent months, steady population growth and all-time low interest rates were expected to revive housing construction by 2021, Reserve Bank of Australia's (RBA) Deputy Governor Guy Debelle said in a speech.

Housing is a significant part of Australia's A$1.95 trillion ($1.3 trillion) economy, with residential construction accounting for around 2% of total employment and 6% of the country's gross domestic product (GDP).

"Much of the downturn in construction activity is still ahead," Debelle said in Sydney in a speech titled "Housing and the Economy."

Home prices and construction activity in Australia peaked nearly two years ago with approvals to build new homes around 40% lower than their late-2017 highs.

"We are forecasting a further 7% decline in dwelling investment over the next year, and there is some risk the decline could be even larger," Debelle added.

"This will directly subtract around 1 percentage point from GDP growth from peak to trough..."

Housing also impacts consumption. The RBA's standard estimate of the wealth effect is that a 10% fall in housing prices leads to a 1.5% fall in household consumption over time.

Debelle also noted the recent downturn has had a "larger-than-expected" spillover effect on inflation as rents and new dwelling purchases together account for around one-sixth of the CPI basket.

In addition, a decline in housing turnover has weighed on "ownership transfer costs" such as stamp duties and fees paid to real estate agents and lawyers. These costs are down more than 20% over the year to the March quarter, shaving around 0.5 percentage points of GDP.