Two more rate cuts likely in this cycle, but Victoria to miss out on next phase of housing growth: BIS Shrapnel’s Frank Gelber

The Reserve Bank is closely watching the housing market and will cut rates until they spark a recovery in the sector and other non-mining sectors, according to BIS Shrapnel chief economist Frank Gelber.

Speaking at the BIS Shrapnel September economic outlook conference, Gelber said he expected there would likely be two more rate cuts in the current cycle, though officially the research group’s position is only one rate cut.

Gelber said there had been some internal debate within BIS Shrapnel about interest rates.

“We need an undersupply of housing and an interest rate trigger to spark a recovery,” Gelber said.

“We need more rate cuts to help the housing sector, which is the sector the RBA is most closely looking at.”

He said interest rates in Australia were currently very high compared with other first-world countries, meaning the RBA had the ability to reduce them to stimulate housing and other non-mining sectors.

However he expected the Australian dollar to continue to remain strong over the next two years, unless there were an unlikely collapse in commodity prices – bad news for trade-exposed sectors like manufacturing, tourism and education services.

Gelber said he believed the mining boom had at least two years of solid investment growth, but after that the picture was uncertain.

During this time other sectors, including real estate, needed to ramp up their investment for the next phase of growth, said Gelber.

According to BIS Shrapnel, real estate is growing at around 3.2 per annum, compared with GDP of 3.7 – performing in the middle range of growth, with the strongest sector being wholesale trade (6.9%), with mining at 4.9% and the weakest being manufacturing – falling 3.1%

"There are huge disparities in sectors," Gelber said.

However, Gelber said that states like Victoria, which now had an oversupply of housing due to be too overly optimistic in the past, would miss out on the next phase of growth for the housing sector.

He expected the beneficiaries of the next growth phase to be the mining states of Queensland and WA, with NSW also benefiting.

“All the other states will miss out.”

Gelber said Tasmania was particularly badly off without any major investment or projects to sustain it.