Chief economist update: Keep one eye open on the housing market

Perhaps it's the long weekend holiday - AFL Grand Final holiday on September 28, Labour Day on October 1 - or maybe it's been out-headlined by news of the US-Mexico-Canada Agreement (USMCA).

But the Reserve Bank of Australia (RBA) met as usual on the first Tuesday of the month (except January), on October 2.

It could be both, plus of course, the fact that not a single soul and his dog anticipate anything new from the Australian central bank at the conclusion of its board meeting.

The RBA did not disappoint. It kept the official cash rate unchanged at the record low 1.5% - where it had been for 27 months (and counting) - as well as making only minor tweaks to its policy statement.

With the results of the second quarter National Accounts on hand, the RBA had to underscore the latest result showing that the economy grew by 3.4% in the year to the June quarter, for it justifies its central forecast "for growth to average a bit above 3 per cent in 2018 and 2019."

The rest are virtually a copy and paste exercise. "The outlook for the labour market remains positive ... Wages growth remains low, although it has picked up a little ... The improvement in the economy should see some further lift in wages growth over time, although this is likely to be a gradual process."

"Inflation is around 2 per cent. The central forecast is for inflation to be higher in 2019 and 2020 than it is currently."

"Conditions in the Sydney and Melbourne housing markets have continued to ease and nationwide measures of rent inflation remain low."

Indeed. CoreLogic's "5 capital city aggregate" home value index decreased by 4% in the year to October 3, owing to a 6.1% year-on-year drop in Sydney home values, a 3.5% decline in Melbourne and a 2.8% fall in Perth - Brisbane and Adelaide gained 0.75% and 0.72%, respectively.

This is also affirmed by the slowing private credit to housing - it slowed for the 12th consecutive month to 5.4% in the year to August from 6.6% in the same month last year - credit for investor housing has slowed to an annual rate of 1.5% from the most recent peak of 5.1% (June 2017) while those for owner-occupiers eased to 7.5% from 8.1% (February 2018).

So far so good, the housing market bubble is deflating in an orderly fashion. But the RBA should be alert that this doesn't build momentum and render its optimistic forecasts undone.

Should this happen - and because of housing's large multiplier effect on the general economy - the RBA might need to take interest rates the opposite way of its (and consensus) expectation that the next move would be up (whenever that may be).

Read more: RBAReserve Bank of Australia
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