The House Price Fall Resumes in April
The RPData daily house price series confirm a 0.7% fall in house prices in April (end of month data, not seasonally adjusted) after prices were relatively flat (down just 0.1%) in the first three months of 2012. In month-end terms, house prices have reached a new low for the cycle.
One aspect of the ongoing moderate house price falls that is welcome is more favourable affordability through market driven means.
The negative side of falling house prices are multi-layered. Household wealth is being eroded which suggests less confidence and purchasing power. Recall that nearly 70% of the people own (or are buying) their own house for living in, plus there are more than 1 million second, third, fourth and more houses owned by these people which magnifies the impact of any significant cycles in house prices on wealth and confidence.
For the banks, there is a slow but steady risk that more households drift into negative equity as house prices fall (in crude terms, anyone who bought a house n the last 2 years could be out of the money). If this becomes more common, then the consumers under water with their finances stop spending; the banks losing money on mortgages restrict new lending and the economy stalls. This is the worst case scenario.
Clearly, the RBA does not target house prices, but it does take note of house price trends for the consequences for the economy and the inflation outlook when it sets monetary policy. Perhaps house pries have already fallen enough to sow a seed of concern about the risks of some economic stodge unfolding. There seems to be some risk of this being priced in to bank funding costs and into the current yields in the government bond market.