Friday, May 25, 2012

Falling Prices Put a Dent in Demand

A bit late on this one, but it's an excellent example of the flip side of the speculative bubble expansion. Falling prices should not suppress demand for a good. Think about it. Nor should rising prices increase demand. Both of those are circus-tent-sized flapping red flags warning of a speculative environment. If people are buying for consumption, the opposite will be true in both cases. Just a note for future reference. We will hit this full cycle again in the future. Job security, falling prices dent housing demand: RBA
Capital city home prices have fallen 4.5 per cent over the year to April, according to RP Data, even as the latest labour data showed the unemployment rate dropped to 4.9 per cent in the same month, from 5.3 per cent in March.

. . .

Home loans rose 0.3 per cent in March, after declines in both January and February although overall activity in the housing market remains subdued. In making its big interest rate cut on May 1, the RBA noted that credit growth for households “had been marginally lower over the past year than over the previous year.”

“Despite dwelling prices declining relative to incomes and rises in rental yields, forward-looking indicators implied little prospect of an imminent recovery in housing construction,” the RBA said. In the May meeting, the central bank cut the cash rate to 3.75 per cent from 4.25 per cent in a bid to stoke demand in the economy. The major banks passed along only about 37 basis points out of the RBA's 50 basis-point cut.

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