The Reserve Bank of Australia (RBA) was close to suspending the entire Australian property market in April, according to reporting from the ABC.
The RBA has been putting on a happy face of sorts during the recent economic and financial turmoil.
But the reporting (obtained under Freedom of Information laws) reveals that behind closed doors, the RBA’s outlook was less optimistic.
Speaking notes from RBA Assistant Governor, Luci Ellis report her stating:
“Demand for new housing has declined substantially since mid-March and is expected to decrease further [with] sharp falls in sales, enquiries and foot traffic [and] increases in contract cancellation rates… Housing prices are expected to decline by around 7 per cent over the next year. Prices are expected to remain around 10 per cent lower than at the February Statement over the forecast horizon”.
Shockingly, the ABC also reports that the RBA was advised to consider implementing a ‘pause’ to the housing market. This was in order to dampen reports of a ‘housing collapse’ which had the potential to spook nervous investors.
Notes from RBA economist, Nick Garvin reveal that Garvin wrote to the RBA board and recommended the pause. Garvin stated, “I think it’s dangerous for regulators to be reporting on housing prices as though the market is currently functioning.”
The article also reports that this attitude towards housing may have influenced the government’s HomeBuilder program, announced in early June. Under HomeBuilder, new home constructions, as well as renovations, can attract government grants up to $25,000.
What does all this mean for ASX shares?
Although they are not too closely correlated, the housing market and ASX share market walk hand in hand to an extent. The real dangers (in my view) of a housing collapse stem from what’s known as the wealth effect. This refers to the tendency of people to ‘feel poorer’ if the assets they own fall in value. Although many people will be materially unaffected if property value drops, they will be less inclined to spend and more inclined to save or pay off the mortgage.
This is bad news for the Australian economy, and therefore bad news for the ASX-listed companies that dwell within it.
We’ll have to wait and see for the full impacts from the coronavirus pandemic on Australian house prices. But I think early signs say the worse is behind us. The real test will be when government assistance programs like JobKeeper are wound back, come September.
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Motley Fool contributor Sebastian Bowen has no position in any of the stocks mentioned. The Motley Fool Australia has no position in any of the stocks mentioned. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.
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