Australia's housing downturn a larger-than-expected drag on economy

SYDNEY (Reuters) - Australia’s property downturn is hitting household consumption and is a big drag on economic growth and inflation that will likely last at least another year, despite three interest rate cuts, a senior central bank official said on Thursday.

FILE PHOTO: A worker stands on scaffolding at a construction site for a new residential complex in Sydney, Australia, February 20, 2018. REUTERS/David Gray

However, an uptick in home prices in recent months, steady population growth and all-time low interest rates were expected to revive housing construction by 2021, Reserve Bank of Australia’s (RBA) Deputy Governor Guy Debelle said in a speech.

Housing is a significant part of Australia’s A$1.95 trillion ($1.3 trillion) economy, with residential construction accounting for around 2% of total employment and 6% of the country’s gross domestic product (GDP).

“Much of the downturn in construction activity is still ahead,” Debelle said in Sydney in a speech titled “Housing and the Economy.”

Home prices and construction activity in Australia peaked nearly two years ago with approvals to build new homes around 40% lower than their late-2017 highs.

“We are forecasting a further 7% decline in dwelling investment over the next year, and there is some risk the decline could be even larger,” Debelle added.

“This will directly subtract around 1 percentage point from GDP growth from peak to trough...”

Housing also impacts consumption. The RBA’s standard estimate of the wealth effect is that a 10% fall in housing prices leads to a 1.5% fall in household consumption over time.

Debelle also noted the recent downturn has had a “larger-than-expected” spillover effect on inflation as rents and new dwelling purchases together account for around one-sixth of the CPI basket.

In addition, a decline in housing turnover has weighed on “ownership transfer costs” such as stamp duties and fees paid to real estate agents and lawyers. These costs are down more than 20% over the year to the March quarter, shaving around 0.5 percentage points of GDP.

“We had not fully taken account of this in our forecasts of GDP and it is part of the explanation of why GDP growth has turned out to be slower than we had expected,” Debelle said.

Reporting by Swati Pandey and Wayne Cole; Editing by Sam Holmes