A study by the Australian central bank shows that incomes, not just property weakness, are essential for policy

SYDNEY (Reuters) – Falling real estate prices in Australia would not necessarily translate into lower official interest rates if growth and inflation expectations remain strong, a central bank study said Thursday.

Although the Reserve Bank of Australia (RBA) report is not a forward-looking policy document, it provides insight into the research that shapes its views.

The newspaper also appears as the country's once-booming real estate market and consumers in the economy of $ 1.9 trillion (US $ 1.36 trillion) that reduced their spending.

The article, published in the monthly bulletin of the RBA, said "a decline in housing prices would have fewer negative consequences if it were offset by other events, which means that the economic outlook is positive and that the unemployment rate is falling ".

He also noted that "despite the fall in housing prices, interest rates may not be reduced as much to offset the effect of this decline" if households and businesses anticipated strong growth and inflation in line with targets from the central bank.

The research highlighted the uncertainties badociated with estimating the effects of falling real estate prices on household consumption. He identified a "positive and stable relationship" between wealth and household consumption, but this connection was a little broken when prices were in free fall.

"A decline in household wealth is less likely to coincide with lower consumption growth if it occurs at a time when the labor market is strong and household income growth is firm," the researchers said. of the RBA.

The RBA said earlier that the economy was entering "unexplored territories", as the housing crisis has occurred in parallel with unprecedented policy rates and sustained employment dynamism.

Data released earlier in the day showed that the unemployment rate in Australia fell to 4.9%, its lowest level in eight years, as job growth prolonged its dream.

However, one can wonder to what extent unemployment could fall further and how households would react to a prolonged slowdown in the housing market. The Australian housing stock is worth 6.68 billion Australian dollars, but dropped by 280 billion Australian dollars since its peak reached early 2018.

A growing number of economists are already expecting a reduction in the official cash rate of a record 1.50% this year, while the financial markets are fully considering a policy of $ 1.50 billion. easing as early as September.

RBA modeling shows that net wealth is not the only determinant of consumption. Household disposable income, the level of real interest rates, the unemployment rate and economic performance also matter.

The RBA has also examined the effects of a prolonged drop in housing prices – an experience that Australia has not experienced yet.

"The net effect of a decline in housing prices that occurs when general macroeconomic conditions are positive could be only a slight slowdown in the pace of economic activity" said the RBA.

"However, if the same fall in housing prices occurred in parallel with a more general downturn in economic conditions, this might add to any easing of monetary policy resulting from the more general slowdown."