Australia's Economy Can Cope With Property Slump, RBA's Lowe Says

(Bloomberg) -- Australian central bank chief Philip Lowe said the nation’s economy can handle the current property downturn even as slumping house prices start to impact consumer spending.

In a wide-ranging speech looking at the intersection of the housing market, consumption and incomes in the economy, Lowe reiterated the Reserve Bank of Australia is betting that employment growth will eventually lead to faster wage gains and help offset the impact of falling property values.

Australia's Economy Can Cope With Property Slump, RBA's Lowe Says

“Our estimate is that currently, less than 5 percent of indebted owner-occupier households have negative equity, and the vast bulk of these households continue to meet their mortgage obligations,” he said in the text of an address to an Australian Financial Review conference in Sydney Wednesday. “The adjustment in our housing market is manageable for the overall economy. It is unlikely to derail our economic expansion.”

The governor said that the drop in house prices -- down 13.2 percent in Sydney from their peak -- is still manageable in an economy where unemployment and interest rates are low. These factors are allowing people to meet their loan obligations, even if weak income growth “means that household finances are sometimes strained,” he said.

“Wealth effects are influencing consumption decisions, but they are working mainly through expectations of future income growth,” Lowe said. “Swings in housing prices and turnover in the housing market are also having an effect, but they are not the main issue.”

Australia's Economy Can Cope With Property Slump, RBA's Lowe Says

On the implications for consumption, the RBA chief said low housing turnover was probably most important, as people tend to spend heavily when they set up a home.

RBA officials have run numbers on how changes in housing wealth affects spending, Lowe said. They estimate that a 10 percent lift in net housing wealth raises the level of consumption by around 0.75 percent in the short run and by 1.5 percent in the longer term.

“They have also examined how this wealth effect differs by type of spending,” he said. “They find that it is highest for spending on motor vehicles and household furnishings and that for many other types of spending the effect is not significantly different from zero.”

Credit Squeeze

Meantime, in the wake of widespread scrutiny of lax lending standards during an inquiry into financial industry misconduct, Australian banks are moving to a ‘new normal’ for mortgage lending. This has involved closer scrutiny of people’s expenses and ability to service a loan that are reducing the maximum amount someone can borrow.

“As lenders recalibrated their risk controls last year, the balance may have moved too far in some cases,” Lowe said. “Now, as lenders continue to seek the right balance, we need to remember that it is important that banks are prepared to take credit risk. And it’s important that they have the capacity to manage that risk well. If they can’t do this, then the economy will suffer.”

On monetary policy, he reiterated that there are “plausible scenarios” under which the next move in rates is up and under which the next move is down. “At the moment, the probabilities appear reasonably evenly balanced,” Lowe said.

Money markets are betting the RBA will cut rates in the next 12 months from the current record low 1.5 percent, where Lowe has kept it unchanged since taking the helm in 2016.

©2019 Bloomberg L.P.