Peaking Australian Housing Activity a Risk to Growth

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Signs of a peak in Australian housing-sector activity are raising questions about what will drive the otherwise lackluster economy, and increasing the likelihood that interest rates will be cut again soon.

The value of loans being written for housing investors declined for the second consecutive month in August, falling 0.4% from July’s level, government data last week showed. That represents a success by the Australian Prudential Regulation Authority, the country’s bank regulator, which had sought to stymie a worrying surge in lending to property investors earlier this year by working with banks to limit growth in such lending by banks to 10%.

But economists are now warning that too much of a slowdown in housing could add to the drag on an economy already suffering from falling commodity prices and weak investment spending. The economy grew at the slowest pace in four years in the second quarter.

Signs of a peak in housing activity can be seen in credit growth, house sales by auction rates, house prices, settlement volumes and the dollar value of settlements–all showing signs of slowing– Macquarie said in a research note. Its economists expect a decline in house prices starting next March, with a 7.5% decrease likely over time. That compares with 10% rise nationally in the past year.

To try to spark the economy, the Reserve Bank of Australia could cut interest rates again as early as November, taking its official cash rate down to a record low 1.75%, Macquarie said.

According to separate research by Credit Suisse, falling housing demand would severely inhibit the economy. Credit Suisse also expects a further cut in rates soon–and warns that housing investment now appears more risky that investment in shares.

“Housing is no longer the traditional safe-haven asset,” it said in a report Monday.

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