This could get ugly …
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Article in the Australian Financial Review: Why the RBA should be worried about house prices: Moody’s
- Report from Moody’s today
- Moody’s explored the relationship between consumption and changes in house prices and the stock market
- Suggests the bank may be relying on out-dated analysis that understates the sensitivity of consumer spending to changes in house price
- “The RBA is relying on outdated numbers and the transmission mechanism in Australia does not work the same way as it did a decade ago” … could result in a policy mistake
- Says the RBA might be better cooling off house prices now rather than allowing for a sharper correction, if the bank starts hiking rates
- If the RBA were to steadily lift rates in 2015, the older ‘wealth effect” assumptions would predict a modest in a 0.4 per cent fall in consumption while Moody’s updated numbers would result in a more severe 1.3 per cent fall. Levine therefore warns that higher rates could be bigger drag on the economy than previously thought.
