This article first appeared on the Yahoo 7 website at this link: https://au.finance.yahoo.com/news/heres-reserve-bank-needs-cut-rates-000642869.html 

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An RBA rate cut is not about housing – it’s about exports and investment

Many people misunderstand my concern about falling house prices and the coincident call for the Reserve Bank to cut official interest rates.

Any interest rate cut that the RBA may yet deliver should not, and certainly will not, be aimed directly at supporting house prices. On the contrary – future interest rate cuts should be directed at supporting the economy more generally at a time when the house price falls threaten to erode household wealth, consumer spending and the economy more generally.

The house price declines in the current downturn are much what I was forecasting a year ago. The issues surrounding the price falls are being compounded by the recent acceleration of the decline, the historic collapse in housing auction clearance rates, the escalation of the bank credit freeze and the on-going problems with low wages and inflation that are all creating an environment that will hit the economy into 2019.

While a recession in Australia is still unlikely, very unlikely in fact, there is a growing risk the unfolding mix of events will hit the economy hard.

The destruction in household wealth from the falls in house prices alone is now about $300 billion. Add to this another $100 billion of wealth destruction from the recent fall in the stock market, and a climate of severe weakness in consumer spending is front and centre in the outlook for most credible forecasters.