Falling household consumption, fuelled by declining real estate values and high debt levels, is a key source of uncertainty for the Australian economy, the Reserve Bank has warned.
In the minutes from its early-December meeting, the RBA board noted evolving headwinds as “this combination of factors posed downside risks”.
Australia’s central bank also said housing markets in Sydney and Melbourne had continued to ease from record-high values and that lending had tightened as a result of the revelations from the banking royal commission.
“Lending to investors had remained very weak and growth in lending to owner-occupiers has continued to ease … credit conditions were tighter than they have been for some time,” the RBA wrote in its minutes.
“The focus on responsible lending obligations in response to the royal commission … was likely to have reduced some lenders’ appetite for lending to both households and small businesses.”
Apartment demand and slow wage growth
In a recent speech, RBA deputy governor Guy Debelle urged big lenders not to embark on a credit squeeze and said it was critical that banks maintained a credit pipeline and an appetite for risk.
The RBA said demand for new housing in eastern Australia had eased and that the slowing demand “had become more pronounced”.
Feedback from developers also showed demand for off-the-plan apartments had also “declined significantly” since mid-2017.
The RBA confirmed there was a slight pickup in wages in the September quarter — taking it up to a 2.3 per cent increase over the year.
However, the minutes said average earnings were barely keeping up with inflation growing at “roughly the same rate as consumer prices” over the past five years.
The growing use of technology and the outlook for artificial intelligence replacing traditional jobs, especially in the finance sector, is likely to impact wages and salaries, the minutes noted.
Furthermore, it said the “increasing use of technology to replace manual effort” was a challenge in measuring services for the National Accounts.
The RBA restated that the next move in interest rates was more likely to be up than down, but said there was no strong case for a near-term adjustment in the cash rate, which remains at a historical low of 1.5 per cent.
The minutes indicated the Australian economy was continuing to perform well.
That was despite the housing and consumption headwinds with gross domestic product (GDP) growth expected to track above 3 per cent and the 5 per cent jobless rate lifting hopes that wages growth will gradually recover.
The RBA board will hold its next meeting in February 2019.
Follow Peter Ryan on Twitter @peter_f_ryan.