Price falls that made the Reserve Bank home in on housing

8 May 2004

By far the most important news in yesterday's Reserve Bank statement on monetary policy is that house prices have started falling across the nation.

The central bank is cautious, warning that the data is volatile and needs to be interpreted with care. But here is its conclusion:

"Overall, while no single indicator can be regarded as definitive, the preponderance of price falls in the major cities suggests that for Australia overall, house prices declined in the March quarter."

Think about that for a minute. A lot of Australians believe that house prices never fall, yet here it is happening. And it is not just a matter of house prices failing to keep pace with inflation - that is, falling in real terms.

The house price falls shown in the table are falls in nominal house prices, and they are taking place in every capital city in Australia, according to the only Australia-wide measure currently available - the Commonwealth Bank's house price series.

These figures are published for the first time in yesterday's RBA statement, as is the second price series in the table, which comes from Australian Property Monitors, and show falls in every capital city except Adelaide (there is no figure for Hobart). This house price series is produced for the Reserve Bank, and is the most up-to-date.

As you can see from the table, the Commonwealth Bank series shows an Australia-wide average fall of 3.2 per cent, while the APM series shows a fall of 8.4 per cent. The Reserve Bank figures are the first hard data confirming house price falls.

The table also confirms falling prices for investment properties in Sydney and Melbourne (the RBA regards the big fall showing for Perth as an aberration). "For Australia overall," it says, "the declines in Sydney and Melbourne outweigh the rises elsewhere, implying a substantial fall in prices nation-wide."

The RBA also mentions the fall in auction clearance rates across the capital cities, and signs of weakening buyer sentiment in surveys.

The only market analyst I read yesterday who understood the importance of these figures was Rory Robertson of Macquarie Bank. Rory, who can be a bit excitable, called the house price table the most sensational data table the RBA has ever published.

Is this the bursting of the investment property bubble spreading to housing? Is this the start of a housing crash?

The Reserve Bank has hardly been aggressive in raising interest rates, but as I have pointed out here before, we are sailing in uncharted waters because of the high level of household debt. We are not sure what interest rate rises that are modest by historical standards will do to households' behaviour - both as house buyers and consumers.

So far the Reserve Bank is probably more relieved than worried by the price fall, because it takes the pressure off interest rates. The bank has been worried for some time that if it couldn't cool off the housing market the boom could build up to a bust big enough to take down the Australian economy with it.

That is why it started putting rates up in 2002 and increased them again last November and December. With evidence of slowing in house lending and falling house prices, it will be in no hurry to put rates up again.

Commenting on the fall in property loan approvals the RBA observes that it "is advantageous that this adjustment is occurring at a time when the broader macro-economic situation is favourable". The same comment applies equally to the fall in house prices.

The RBA's assessment is that both the international and local outlook is supporting continued strong growth in the Australian economy. It says the two big risks to the economic outlook - a rapidly rising Australian dollar and too rapid growth in housing-related credit - have diminished in recent months.

It notes that consumer confidence is high and says that while households' debt servicing ratio is now higher than its previous peak in the early 1980s, there is no sign that consumers are starting to pull their horns in. Credit is still readily available, and so far Australians are happy to go on borrowing and spending.

This could, of course, change quickly if house prices keep falling. It is too soon to be sure. In the UK, which has a runaway housing boom, prices retreated for about six months and then started rising again, causing the Bank of England to raise rates this week.

If property prices here do begin to fall more swiftly, the Reserve Bank has plenty of room to cut rates, and will - so don't start panicking just yet. A moderate fall in house prices is good news - not bad - if it avoids a much bigger fall later.

Reproduced from The Australian newspaper, 8 May 2004.