Low inflation: The lucky escape for the lucky country

  • By Steven Dooley, Currency Strategist, Western Union Business Solutions

There’s only one topic at barbecues and Melbourne Cup parties across the nation this week: falling house prices. 

The fall in house prices – especially in Sydney and Melbourne – became more pronounced in 2018. Last week, real estate analysts CoreLogic reported Australian home prices fell 3.5 per cent over the last year. This was the sharpest fall since 2012.


Worryingly, a large drop in auction clearance rates – with Sydney clearance rates reported at a crash-inducing level of 44% over the weekend of 3-4 November – could signal there are further, sharper losses ahead.


Talk of a global boom in housing markets dominated the pre-GFC era. 

The history might be re-written as “no-one saw it coming” but the risks of a broader housing market crash were debated endlessly during the 2000s. In that decade, a combination of low interest rates in the US following the technology crash, and the introduction of a European-wide monetary policy setting after the introduction of the euro, helped fuel a global boom in housing prices. 

Of course, Australia wasn’t immune from this push higher in housing prices, but as the rest of the world suffered during the global financial crisis, the Australia housing market managed to see only a small pullback before the party marched on.

Only the lonely

 

Australia wasn’t the only country to avoid the GFC-driven housing selldown. New Zealand, Singapore, and Canada all managed to survive relatively unscathed too.

Remarkably, despite the fact that local politicians are likely to tell you the avoidance of the global sell-down was due to good economic management, the fact that these Pacific Rim counties all featured prominently in Chinese real estate catalogues gives a hint to the actual reason behind their support. 

A flow of outward investment from the booming Chinese economy supported these housing markets while most others – like the US, UK, Ireland and Spain – felt the pressure in the post-GFC period. 

So, if we see a slowdown in Chinese outward investment, will that be enough to see a large fall in local house prices? 
Critical rates 

A slowdown in external demand is likely to be one reason for a slowing in houses prices that, unsurprisingly, has been replicated in NZ, Canada and Singapore over the last 12 months. 

But pre-GFC, the big driver in developed nation housing markets during the boom period was low interest rates. Correspondingly, the prick that burst the bubble came from rising interest rates. 

While there’s no doubt the Australian housing market is suffering though a soft patch, the question is whether interest rates will climb fast enough to turn a “soft patch” into a “calamity”. 

No news is good news

So, while we are caught up discussing last week’s gloomy housing market news, perhaps we missed the most important news as Australian September-quarter inflation missed the Reserve Bank of Australia’s target for the eleventh quarter in a row. 

This report last Wednesday showed Australian underlying inflation, reported at 1.8% versus the RBA’s 2-3% target, has been below this target for almost three years – and current RBA forecasts indicate the inflation rate might remain below target for two more years. 

In this low inflation environment, can the RBA even consider raising rates? And, with interest rates low and unlikely to rise for the foreseeable future, can the Australia housing market avoid a more catastrophic price fall? 

Considering that getting the inflation rate into the target zone is the RBA’s only mandated goal, will their policy failure turn out to be a lucky escape for the lucky county?