(Adds analyst reaction, background)
* Capital city house prices -1.1 pct q/q, -4.5 pct y/y
* Manufacturing index drops to 7-mth low in April
* RBA seen cutting rates 25 bps, chance of 50 bps move
By Wayne Cole
SYDNEY, May 1 (Reuters) - House prices in Australia’s major cities fell for the fifth straight quarter in the three months to March, underlining the weakness of the housing market in general and adding to pressure for an immediate cut in interest rates.
The Reserve Bank of Australia (RBA) holds its monthly policy meeting Tuesday and is widely expected to cut its cash rate by at least 25 basis points to 4.0 percent given benign inflation and disappointing economic growth outside of mining.
Housing has been particularly weak with the government’s measure of prices for detached houses falling 1.1 percent in the first quarter, twice the drop forecast. Prices were down 4.5 percent on the same quarter last year, a far cry from the heady growth pace of 19 percent seen as recently as 2010.
“A modest decline in prices is probably a good thing given the pace of rises back in 2010,” noted Spiros Papadopoulos, an economist at National Australia Bank.
“But it does fit with other indicators of softness in housing and is a contributing factor to why the RBA is likely to cut today,” he added. “We see 25 basis points today, with another helping in June.”
A Reuters poll of 22 analysts found all expected an easing this week, and a majority tipped another cut to 3.75 percent next month.
Markets are fully priced for a quarter-point move and imply a one-in-four chance of a half-point easing <0#YBA:>. They also have around 106 basis points of easing priced in for the next 12 months, which would leave rates near the record lows of 3 percent plumbed during the global financial crisis.
Any easing would be warmly welcomed by the Labor government which is trailing badly in the polls yet is set to deliver a tough budget next week aimed at returning to surplus years before most other developed economies.
Australian households are highly sensitive to mortgage rates as over a third have home loans, most of which are variable. Mortgage debt totals around A$1.2 trillion, or 1.5 times household disposable income, and paying the annual interest on it takes almost a tenth of those earnings.
A reduction of 25 basis points in the standard variable mortgage rates saves an average borrower around A$540 a year.
Australia’s banks are expected to only pass on some of this easing to their customers, choosing instead to maintain profit margins in the face of higher funding costs.
The RBA has been on hold since cutting rates last November and December, but recently adopted an easing bias as growth in the A$1.4 trillion economy fell short of forecasts.
A strong currency and intense foreign competition has pressured manufacturing and tourism, while a shift in spending habits by penny-pinching consumers has hit retailers hard.
A survey of 200 firms from the Australian Industry Group and Price Waterhouse Coopers out on Tuesday highlighted the problem.
Its performance of manufacturing index (PMI) dropped 5.6 points to 43.9 in April, the lowest in seven months and well under the 50 level that marks the threshold between contraction and expansion.
One result has been a sharp slowdown in employment growth, though the jobless rate remains historically low at 5.2 percent.
Still, the lofty local dollar has also helped restrain inflation by driving down prices for a whole raft of imported goods, from cars to computers, clothes and flat screen tvs.
The RBA’s preferred measures of underlying inflation braked to a decade low around 2.15 percent in the first quarter, near the floor of its long term target band of 2 to 3 percent.
The RBA is now expected to trim forecasts for both economic growth and inflation in its quarterly statement on monetary policy, to be released on Friday.
“Friday’s Statement will almost certainly reveal lower forecasts for both and provide justification for the easing we expect,” said Su-Lin Ong, head of Australian economics at RBC Capital Markets.
“Our own forecasts involve underlying inflation remaining beneath the midpoint of the target band until Q1 of 2013,” she added. “We think there is a strong case for the cash rate to be 50 basis points lower by June.” (Editing by Ed Davies)