Big 75-basis-point RBA cash rate cut needed in February to override consumer sentiment: John Edwards

The Reserve Bank needs to cut the cash rate by a large amount in one big hit to stimulate a recovery in the housing market, according to Residex chief executive John Edwards.

On the back of November Residex housing market data, which shows many markets in negative territory or treading water, Edwards says the Reserve Bank should look to cut the cash rate by 75 basis points in February.

“Should the RBA continue along the road of small reductions, there is a real risk that it will need to reduce the cash rate to 2% or less.

“However, should it move to a much more significant reduction in February (of around 0.75 percentage points), this would probably achieve its objectives and bring the cycle of small rate adjustments to an end.

“The outcome would be the removal of constant press about the likely poor outcome as the resources boom comes to an end.

“Importantly, it would be probably sufficient to stimulate consumer spending and encourage small business investment. In all probability, this outcome would lead to a much improved level of consumer sentiment,” he says.

Edwards says housing markets had done better in 2012 compared to the previous year, but had failed to keep pace with inflation.

“The majority of cities have produced negative real rates of growth (after taking inflation into account). In fact, the real growth was a -2.8% in housing while for units it was -1.23%,” says Edwards.

Speaking to Peter Switzer on Sky Business last week, he said the vast majority of capital cities in November provided negative growth.

And he expressed concern at the drop in Perth house prices in November (down 1.39%), which he said indicated that resources activity was slowing much faster in Perth.

“We can see it in the numbers,” he says.

Edwards said that in the past smaller rate cuts had made an impact because there was both better consumer sentiment and affordable housing.

He said the current small 25-basis-point rate cuts were part of a circle where the consumer heard bad press about the economy at the rate cut as well as news about the resources boom slowing and news on the international economy.

He says the effect is that the 25-basis-points cuts constantly reinforce the view of the consumer that there are problems.

“Poor consumer sentiment is having a negative impact on things,” he said.

Despite his concerns, Edwards says that “courageous” people willing to buy now will do well if they can seek out bargains.

Edwards says he himself is in the market for renovation bargains.

Despite the poor performance of the market in 2012 in real terms, Edwards says he expects all adjustments in house prices since the GFC to be “recovered in the medium term, and prices are anticipated to be equal to or better than before the GFC”.