Why there's nothing to fret about the housing downturn

By Gerv Tacadena

The price falls in two of the biggest housing markets in Australia should not cause any harm to the economy.

The price falls in two of the biggest housing markets in Australia — Sydney and Melbourne — should not cause any harm to the economy, Reserve Bank of Australia (RBA) Governor Philip Lowe said in a parliamentary hearing.

While Lowe recognized the impact of the price declines, he said the adjustment in prices was unlikely to derail Australia's economic performance.

"It will put our housing markets on more sustainable footings and allow more people to purchase their own home. So there is a positive side too," he said.

The central bank governor dismissed claims made by many industry watchers that the downturn has already gone too far, as the supply glut worsens in the big east coast cities.

"I don't see signs of fundamental disequilibrium between supply and demand now in the market. In some parts of Sydney maybe there are a few too many apartments, but if you look at Sydney as a whole, I don't think we've built too many dwellings," he said.

Also Read: Expect larger price declines ahead as lending slumps

Instead, Lowe thinks that sluggish income growth poses a greater threat to the economy, as it could further dampen consumer spending.

"Aggregate household income used to grow at 6%; [now] it's growing sub-3. That's a big difference, and you accumulate that over three or four years and income is 8, 10 or 12 per cent lower than it otherwise would have been," he told the members of Parliament.

For RBA's part, Lowe said keeping the interest rates low enough and stable for an extended period of time is beneficial to ease the pressure on households. However, he said the central bank needs help from the Fair Work Commission and employers to raise wages — latest figures revealed that pay packets increased only by 2.3% last year.

The Fair Work Commission provided a 3.5% pay hike for people earning minimum wage last year. Lowe said he expects the commission to do the same this year.

"If workers get their normal long-run share of that productivity increase then their real wages should rise by 1% a year. So 2.5% for inflation plus 1% at least for productivity growth would give 3.5% wage growth, so for me, that's the best steady state," he said.

Taking into consideration these expectations, Lowe said unemployment could sink further below 5%.

"I think this country can have an unemployment rate close to 4.5% without wage growth causing problems for inflation," he said.

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