The Reserve Bank will be forced to make two cuts in interest rates this year as falling house prices create a “negative wealth effect” that will drag down the whole economy, says one of Australia’s most respected economists.
The cuts would most likely come in August and November and would reduce the cash rate to a record low of 1%, Westpac’s chief economist, Bill Evans, predicted on Thursday.
If his prediction proves correct, mortgage holders could see their monthly repayments reduced significantly if the big banks pass on the cuts.
Most economists have forecast that the central bank would cut rates only once this year in the face of expected slower economic growth.
But Evans has cut his outlook for economic growth from 2.6% for this year to 2.2% after data continued to show that house prices and new mortgage credit were steadily weakening.
When Bill Evans talks RBA, traders listen. $AUD erases earlier gains as Westpac calls Aussie rate cuts, citing a slowdown in GDP to 2.2 per cent, and an unemployment rate that ought to tick up to 5.5%. #ausbiz https://t.co/5sipzlCEFI
— Kyle Rodda (@KyleR_IG) February 21, 2019
Wow! $WBC Evans now calling for TWO #RBA rate cuts this year #ausbiz #AUD #ASX after that jobs report....
— Nadine Blayney (@NadineBlayney) February 21, 2019
Momentum in the economy “slowed dramatically” last year, he said. The bank now forecasts 5%-10% falls in property prices in Sydney and Melbourne this year and the much sharper than expected fall in mortgage credit in the second half of 2018 was creating a negative feedback loop for house prices.
“That negative wealth effect is therefore likely to persist through 2020 with a further extension of the soft profile for consumer spending.”
Overall, he said the RBA’s admission this month that rates could fall further has tipped the balance decisively towards more aggressive reductions in borrowing costs.
“The decision by the Reserve Bank board to accept the possibility that interest rates could fall further, despite the current record low levels, is profoundly important,” he said.
“Westpac now expects the Reserve Bank to cut the cash rate by [0.25%] in both August and November this year,” he said.
Bill Evans, unlike many nongs on Twitter, knows the labour market lags the business cycle
— Stephen Koukoulas (@TheKouk) February 21, 2019
Like other forward looking & non-lemming economists, Bill sees the lurch to a significant slowing & as someone who is interested in growth, has called the RBA out
“Aussie Swings to Loss on Westpac’s Rate-Cut Call”... ““Bill Evans considered premier punter on forecasting RBA”
— Walter White (@heisenbergrpt) February 21, 2019
Lol. U got Bill Evans’d
The prediction follows a report that predicted a “bloodbath” for property prices in Australia. The study by LF Economics said prices in Sydney and Melbourne could fall by 15%-20% in 2019 alone in both cities.
“Given that real house prices have already declined by 15% and 12% in Sydney and Melbourne respectively from their peaks in 2017, this will represent a significant cut to real prices from the peak to Dec-2019,” the report said.
Into the bargain, house prices face a number of mounting headwinds including further lending restrictions, fewer foreign buyers, the possible dismantling of the mortgage broker industry and the reduction in the number of interest-only loans available to borrowers.
The report also said class actions against the big four banks for past poor lending standards would also serve to restrict lending.
The first of these legal cases was launched on Thursday when Westpac was accused of irresponsible lending. The lead plaintiffs, Ian and Michelle Tate, were issued five loans worth $1.8m, which they say they were unable to repay and which were only granted because Westpac failed to asses the couple’s income properly.
