Analysis: Some Comfort for RBA from Likely Housing Renovation Stimulus
- Published on
- 01 Jun 2020, 02:58 PM
By Sophia Rodrigues
Of all the uncertainties that is on the mind of the Reserve Bank of Australia, one of the top three ones is the outlook for rent and its impact on the housing market and the economy.
That is why a government stimulus package like a grant for housing renovation would be welcomed by the RBA because it would have immediate impact on spending and jobs. It would help bridge the gap in the economy between now and early 2021 when the RBA expects the trough in construction activity to occur.
According to a report in The Australian newspaper, the government is set to announce direct cash grants for home renovations as part of building stimulus package to rescue the housing construction industry and save jobs.
RBA WORRIED ABOUT RENTAL MARKET
The RBA’s May Statement on Monetary Policy contained a lot of worrying commentary on the housing rental market.
Such is the extent of its worry that the RBA is not convinced there would be lot investor demand even though for the first time in a long time they can get positive cashflow from housing investment. This is because the prerequisite for generating a cashflow is that investors are able to rent the property.
In the statement, the RBA said rental market conditions had deteriorated markedly since mid-March caused both by demand and supply of rental housing.
On the demand side, it is fewer foreign students and drop in long-staying foreign visitors plus an increase in household size as children move back to parents’ house following loss of jobs or reduction in income.
On the supply side, properties previously offered on the short-term accommodation market are now being offered on the longer-term rental market. This is in addition to supply from newly constructed housing.
The RBA is worried that modest decline in rent could turn easily into sizeable impact if it persisted.
Corelogic’s residential property report for May showed rents were generally steady, rising 0.2% m/m after a 0.4% decline in April.
But the report warned that rental rates could fall more than housing values, placing downward pressure on rental yields. “The double whammy of higher supply and less rental demand, especially across unit markets, is likely to place further downwards pressure on yields. In Sydney gross rental yields are already around record lows and Melbourne isn’t far behind.”
Based on deterioration in established housing market conditions and demand for new housing because of poor rental outlook, the RBA downgraded its outlook for dwelling investment.
Dwelling investment is expected to be significantly lower over most of the forecast period than forecast in the previous Statement, the RBA said, adding, that the near-term downgrade to activity incorporates information from liaison citing significantly weaker demand for new dwellings.
An increase in housing renovation would help create jobs in the economy, especially for those workers affected by downturn in housing construction. It would also provide a boost to spending in the economy, which would also help the labor market. Growth in jobs would in turn bring back some of the lost rental demand, which would help the housing market, including new construction.
--Contact: sophia@centralbankintel.com