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House prices soft – more to come

In a report yesterday by JP Morgan and Fujitsu Australia, housing growth is likely to remain subdued, thanks to low levels of credit growth. The report also suggested this was the “new normal” environment, with households likely to save more and lend less, and unlikely to fuel any rebound in house price growth.

According to the Reserve Bank of Australia (RBA), households have increased their saving ratio to about 9.5 per cent of disposable income. Lending credit growth for January 2012 was 3.7 per cent, and house prices are down about 4% on average nationwide over 2011 according to the RBA.

Stockland

On Tuesday, 27th March 2012,as prior confirmation of the news above, Stockland Limited (ASX: SGP) announced that the housing market was deteriorating and March sales were lower than expected, mainly thanks to the major banks lifting interest rates independently of the RBA.

Stockland expects sales to continue to slow for the balance of the financial year.

Bad news banks

All of this is more bad news for the big four banks, Commonwealth Bank of Australia (ASX: CBA), Westpac Banking Corp (ASX: WBC), Australia and New Zealand Banking Group (ASX: ANZ), National Australia Bank (ASX: NAB), as well as other smaller lenders, who rely on credit growth to fuel profit growth.

Bad news too for mortgage brokers, including Mortgage Choice Limited (ASX: MOC), RAMS and Aussie Home Loans.

Interest rates

The Reserve Bank is coming under increasing pressure to drop interest rates. Without a drop in rates, weak housing conditions are likely to deteriorate further, further reducing credit growth, and putting more pressure on the bank’s profits. It’s a vicious circle.

The retail sector has also called for the RBA to drop rates, with Solomon Lew, chariman of Premier Investments Limited (ASX: PMV) slamming the RBA for being out of touch, and suggesting that the Australian economy is in trouble.

While we here at the Motley Fool have learnt our lesson on forecasting the direction of interest rates, it looks more and more likely that the RBA is going to be forced to drop rates in the near future.

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More reading

Motley Fool contributor Mike King doesn’t own shares in any of the companies mentioned. The Motley Fool’s purpose is to educate, amuse and enrich investors. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson. Click here to be enlightened by The Motley Fool’s disclosure policy.

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