September 2, 2019 / 3:11 AM / 19 days ago

UPDATE 1-Resurgent Australian home prices a tonic for flagging economy

* National home prices rise 0.8%, sharpest gain since 2017

* Surprise fall in Q2 inventories to drag on GDP growth

* Risk GDP data on Sept. 4 may show economy at a standstill

* Lasting revival in housing would brighten the outlook

* (Adds inventory, profit data, recasts)

By Wayne Cole

SYDNEY, Sept 2 (Reuters) - Australian house prices boasted their biggest monthly gain since 2017 in August amid record low interest rates and looser lending rules, a much-needed boost just days before data are expected to show the economy expanding at its slowest pace in a decade.

Indeed, figures out Monday showed a surprise drawdown in business inventories that suggested the economy might not have grown at all in the June quarter.

Such a dismal outcome would be an embarrassment for Prime Minister Scott Morrison, who won election in May based largely on a pledge that growth would always by stronger under his watch.

Morrison’s conservative government has so far resisted calls from the Reserve Bank of Australia (RBA) for more fiscal spending to stimulate activity. However, a weak reading on gross domestic product (GDP) on Wednesday would greatly ramp up the pressure for urgent action.

The median forecast had been that the economy grew 0.5% in the June quarter, from the previous quarter, while annual growth braked to just 1.4%.

However, a 0.9% drop in inventories for the quarter implied a subtraction of almost 0.6 percent points, threatening to wipe out growth entirely.

“The large drag from inventories points to substantial downside risk to our forecast of 0.5% growth in GDP,” said NAB economist Kaixin Owyong.

“ This would be a major disappointment to the RBA and suggests it will have to downgrade its outlook further.”

Other data out Monday were more encouraging. Company profits climbed a healthy 4.5% in the June quarter, thanks mainly to the mining sector, though firms remain reluctant to invest as the Sino-U.S. trade war clouds the global outlook.

Business’ annual wage bill also rose a solid 4.5% in the year to June, though mainly because they hired more workers rather than paying employees more.

AUSTRALIA GOES HOUSE HUNTING

By far the most promising release came from property consultant CoreLogic, which showed home prices across the capital cities rose 1.0% in August, while values for the nation as a whole gained 0.8%.

That was the largest increase since April 2017 and the first rise in the national market since October of that year. The Sydney market saw a jump of 1.6% and Melbourne added 1.4%, gains more reminiscent of the bubble days of 2016.

The bounce marks an end to two years of constant decline which ate away at household wealth and confidence, undermining consumption and slowing the economy.

A revival in prices could also prove a blessing for the construction sector, which has seen a severe downturn in new home approvals, particularly for the once red-hot apartment sector.

The turnaround owed much to the RBA, which cut interest rates in both June and July, taking them to a record low of 1%. Markets are wagering it will ease twice more to 0.5%, likely by March next year.

“The significant lift in values over the month aligns with a consistent increase in auction clearance rates and a deeper pool of buyers at a time when the volume of stock advertised for sale remains low,” said CoreLogic research director Tim Lawless.

The upturn is well timed as Australia’s traditional spring selling season kicks off this weekend. The country’s dwelling stock is estimated to be worth a cool A$6.6 trillion ($4.46 trillion), so a revival in prices would fatten household wealth.

“In fact, just looking at the prices increases, it could be said that boom type conditions are returning,” said Kristina Clifton, a senior economist at CBA.

“Lower housing turnover has been one factor behind the slowdown in consumer spending, with households spending less on furniture, furnishings and equipment.”

$1 = 1.4806 Australian dollars Reporting by Wayne Cole; Editing by Sam Holmes & Kim Coghill

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