Chief economist update: Reversal of fortune

Over the past few months, I've been singing sad songs about the Australian economy and the need for the Reserve Bank of Australia (RBA) and the Morrison government to do more to reverse the slowing momentum in economic activity in this 'Lucky Country', but I'm starting to change my tune.

Yes Virginia, I'm still scouring through the pages of the RBA's Statement on Monetary Policy released earlier this month and eureka and by George and by golly, there it was, in black and white ...

"Recent developments have shown that dynamics in the housing market can have more pervasive effects than we had expected. The decline in housing prices and turnover weighed on household spending decisions and housing related inflation in the prices of new homes," it reads.

"It has also reduced unincorporated business income related to the housing industry and measures of the activity involved in buying and selling homes."

Duh! I've ranted many, many times on this space about the large multiplier effect of the housing sector on the general economy and even quoted the HIA Economics Group's report revealing that: "The total multiplier for output and employment in the construction industry is estimated by the ABS to be 2.866. So, for every $1 million increase in construction output, there is an increase in output elsewhere in the economy of $2.9 million."

That was on 7 March 2019, a day after RBA Governor Philip Lowe addressed the AFR Business Summit in Sydney on 'The Housing Market and the Economy', wherein which he stated: "My colleagues at the RBA have examined how changes in measured housing wealth affect household spending. They estimate that a 10% increase in net housing wealth raises the level of consumption by around 3/4 per cent in the short run and by 11/2 per cent in the longer run."

"If so, falling housing prices, and a decline in measured household wealth, could have the opposite effect."

This has now become moot as property prices have started to rebound - prompted by the RBA's rate reductions in June, July and October, as well as  the relaxation in lending restrictions.

APRA announced in late-May that it is ditching its minimum 7% serviceability interest rate banks are required to apply when lending to borrowers (on top of doing away with its restrictions limiting banks' loans to 30% of new interest-only mortgages and dropping its annual 10% lending growth cap).

...and the forward view has also become positive for the property market.

Wannabe homebuyers would again find it harder to purchase a roof over their heads but hey, the flipside is that the economy would be strong enough to keep them in employment or provide better job opportunities.

Just as I've warned that housing's large multiplier effect on the economy and that its decline would have a debilitating effect through its flow-on effects on industries that provide ancillary services and products to the sector, the reverse is true.

Tag in the wealth effect from the rising stockmarket.

This makes me ponder that perhaps, the RBA is correct in waiting for the lagged effects of monetary policy to filter into general economic activity.

The better news, the Morrison government will get to have its surplus cake and eat it too.

Link to something b7zKGPta