The point where Meriton boss Harry Triguboff paused to smile in a 10 minute interview with Financial Review Sunday was when he spoke about interest rates and housing bubbles.
An advocate for further rate cuts until they encourage Australians to buy his high-rise apartments, Triguboff said there should be more confidence in Australia about cutting interest rate given the mining boom experience.
“If the mining boom didn’t create any great bubble in the prices of apartments then half a percent here or there [cut from the cash rate] definitely won’t cause a bubble either.
“So from that point of view we are very happy because we (Australia) now realise this,” said Triguboff.
Earlier in the interview, Triguboff said there was no boom in the housing market at the moment, nor does he want one.
“I don’t want a property boom. We are very far away from property boom. It’s not something we should worry about at this stage.”
Instead he said what was important was continuous growth in the building industry to support population growth.
“We can’t have start and stop in the building industry, we must build continuously.
“This has nothing to do with [the slowdown] in mining.
"Housing development must progress all the time and at faster rate,” he said.
Triguboff identified three things that were needed to stimulate the housing market to aid a sustained recovery.
He was once again critical of the RBA for not acting sooner to cut the cash rate, he highlighted the slowness of local councils to approve new developments as well as the actions of some building unions in parts of Queensland as standing in the way of a stronger residential building pick-up.
“Councils need to approve developments a lot quicker – they are a big bottle neck,” he said.
He said unions need to assist with production of new apartments in markets like the Gold Coast, which are weak.
Chinese investors continue to be the mainstay of Meriton apartment sales, though lower rates have resulted in some Australian buyers and investors coming back.
“We need rates to come down a lot more.
“Rates coming down so far have made it a lot cheaper to hold apartments and I am holding a lot more,’ he said, referring to Meriton stock of serviced apartments and apartments available for lease.
He also said the low rates environment and “rents creeping up” were making it more conducive for investors.
“Before they (investors) would have to pay 7.5% but now it’s 5% - that’s a big difference.
However, he says home buyers believe that the cost of renting and repaying a home loan is about the same, “so they are in no hurry to buy”.
"If prices start to continuously go up then more people will come, but prices have only now started to go up," he says.
There is a likelihood that the Reserve Bank will cut the cash rate again this year – though not in September – and scope also remains for a further rate cut in February, according to Westpac economist Bill Evans.
Evans was the first economist to correctly tip the current easing cycle to begin in November 2011 and was also one of the first to forecast that the cash rate would fall below 2.75%, which it now has.
He is one of just two economists – the other being Richard Gibbs, head of economics at Macquarie Research – who see a terminal cash rate of 2% - 100 basis points below the emergency setting during the GFC.
In a note following yesterday’s rate cut and accompanying statement, Evans highlighted that the government had raised its unemployment forecast for 2013-14 from 5.75% to 6.25% and expects unemployment to remain at this level over the course of next year.
“We expect that the Reserve Bank feels the same way [about unemployment], although Friday's statement on monetary policy will only include growth and inflation forecasts.
“We expect the Bank would therefore have no hesitation in cutting rates again once more information is available on inflation which will print in late October and the response of business/consumers to the election result has been clearly signalled.
“We also believe that these dampening forces will be sustained through into early 2014 providing scope for another cut in February,” he says.
All 28 economists surveyed by Bloomberg following yesterday’s rate cut were in agreement that there won’t be a rate cut on September 3 – just four days before federal election.
However nine out 28 forecast one rate cut in the final quarter of the year including Bill Evans and NAB’s Alan Oster.
Macquarie Research's Richard Gibbs believes there will be two rate cuts before the end of the year.
ANZ economist Ivan Colhoun says the risks for interest rates remain for downward movement with the potential for two more rate cuts “from here, and again, little indication of any upward pressure on rates in the near term”.
Downside risks reflects ANZ’s “strongly-held view that mining investment will weaken significantly over the next 18-24 months and our less strongly held view that other parts of the economy will pick up sufficiently strongly so as to offset this effect”.
“The trend for the unemployment rate, job advertising and capacity utilisation confirm that at this stage, the improvement in the interest-sensitive sectors is not sufficiently strong.
“Based on the trend for these series, the pressure on Australia’s cash rates remains downward and there remains very little prospect of any rise in cash rates before 2015,” he says.
It can be foolhardy to call the end of an interest rate cutting cycle less than 24 hours after the Reserve Bank has delivered an interest rate cut, but there are a few issues emerging that will make any more cuts difficult for the central bank to deliver.
Having been a strong critic of the Reserve Bank through 2011 and 2012 for being too slow to cut interest rates, I made the mistake in January 2013 of calling an end to the rate cutting cycle with a strong global economic backdrop a key reason for that view. Persistently strong jobs data and the low unemployment rate only added to my view that the Reserve Bank would not cut again (Why rates have no further to fall, Jan 22).
This was a classic example of premature extrapolation where a couple of good numbers did not make for a trend.
Thankfully I changed my view back in April when it was clear China was unexpectedly slowing, the Australian dollar was not matching the fall in commodity prices and inflation was set to remain stunningly low. This proved to be a good call (Read between the lines for a rate rewind, Apr 17).
I have held my view that more interest rate cuts were needed until yesterday’s announcement from the Reserve Bank.
At the moment, there is some tentative evidence that the past interest rate cuts – and other influences – are working to see the economy lift from what is a mini-slowdown.
The Australian dollar is down a tidy 10 to 15 per cent from the recent peak, a sure sign of a boost to international competitiveness, especially given that commodity prices have stabilised. Some early signs of the effects of the lower Aussie dollar are coming through already with the trade data for June released yesterday showing a monthly trade surplus of $602 million, which was the fifth straight surplus. Expect exports to be a significant driver of economic growth over the next 18 months. Rate cuts to offset the Aussie dollar’s strength are no longer needed.
A critical aspect of the recent budget update, which has copped so much attention in the heat of the election campaign, is the fact that the influence of government demand on the economy has changed markedly from 2012-13 to 2013-14.
Public final demand fell 1.5 per cent in 2012-13, slicing 0.5 percentage points from GDP in the process. This quite extreme fiscal consolidation at both the Commonwealth but also the State government level is one reason why GDP growth slipped below 3 per cent. In the year ahead, 2013-14, public final demand will rise 0.75 per cent, which will add around 0.2 percentage points to GDP growth. This is a big shift that will add to bottom line GDP.
While the Reserve Bank does not target asset prices, it does get antsy about a sharp lift in house prices and on that score, there is clear evidence that prices are on a march higher. In the last two and a half months, house prices have risen by 4 per cent and are on track for a 10 per cent gain this year. With interest rates at levels never before seen, further house price gains are likely, if not certain. Moderate house price gains are acceptable in the mind of the Reserve Bank, but if the trend becomes too strong not only will there be no more rate cuts but the Reserve Bank would start to figure in hikes.
Other indicators are showing consolidation or gentle increases. Housing construction is trending higher, business expectations are off their lows and consumer sentiment is a little above its long run trend. Credit growth has also ticked higher. With the new low level for interest rates and the Australian dollar and any uncertainty associated with the election soon to pass, these indicators will continue to lift over the medium term.
The global economy is also on the improve with the US, Japan and even the eurozone looking better now than even a few months ago. While China and India are slowing, hard landings seem unlikely given the proactivity policy stance in both countries.
In all of this, the Reserve Bank is made up of mere mortals – they often misread the economy. This is not to say the decision to cut interest rates was wrong – it wasn’t. It is just a way of saying that the pressures on monetary policy can change very quickly and with it, the whole monetary policy direction can also change.
In September 2011, the Reserve noted after its monthly meeting that “the board remains concerned about the medium-term outlook for inflation” and that “productivity growth was weak”. Within a couple of quarters, inflation was cascading to near record lows, productivity was on a roll and the central bank played catch up with a series of interest rate cuts that almost no-one expected.
This is a round-about way of saying, pay close attention to what the Reserve Bank is saying, but don’t take it all as gospel. The Reserve can and does change its view and I suspect it will before year end when it will be looking at stronger growth, a stable unemployment rate and maybe higher inflation. This is why we have probably seen the last rate cut for this cycle.
Business conditions hovered at four-year lows in July as confidence slumped to an eight-month dip, according to NAB’s Monthly Business Survey, July 2013 – and business credit continues to be a significant area of contention.
A falling Australian dollar and the ‘lure of lower interest rates’ proved unable to improve business confidence levels, which reached their lowest point since November, 2012.
The major lender said it’s likely the weakness in business activity and profitability is the key driver of weaker confidence – though it’s also possible that uncertainty over the timing of the Federal election kept businesses wary during the month, as the survey was conducted prior to the election being called.
As a result of the findings, NAB predicts another rate cut as early as November and said ‘more cuts may follow’.
“We remain a touch more bearish than recently revised forecasts from the government and the RBA.”
The Reserve Bank has a lot more work to do. Bank deposits continue to rise so there are still people sitting on the sidelines. The banks have to continue growing their assets to continue to make their super profits. The world is awash with money with literally hordes of boomers building nest eggs. The developed world is awash with money. The low interest rates give the opportunity for young people to get into housing levered around 10 times their incomes. It is wonderful for property prices and banks. I am making investment decisions but they all relate to reducing future consumption costs.
Monthly home loan repayments will rise 40% if interest rates return to 2008 highs and banks might not be taking this into account when lending, according to Fitch Ratings.
Monthly repayments on a $300,000 loan would increase from $1820 to $2544, severely reducing borrowers’ ability to meet their mortgage obligations.
Average standard variable interest rates (SVR) provided by large banks are now at 6.1%, with borrowers usually able to get discounts of 0.5 to 1.0 percentage point, according to Fitch Ratings. But SVRs were at 9.6% as recently as September 2008.
The Reserve Bank of Australia recently cut the interest rate for the eighth time since October 2011 to a record low of 2.5%.
“Australia's current low interest rates, coupled with high house prices and high household leverage, could expose borrowers to future payment shocks when interest rates rise,” Fitch Ratings says.
It says banks should be using serviceability tests using SVRs closer to historical averages than they currently do.
Most banks generally use a buffer of 1.5 to 2.0 percentage points higher than the existing rate when calculating serviceability as well as a minimum lending rate, but Fitch Ratings says this might not be enough.
“A minimum lending rate can capture the risk that rates return to average historical levels that are higher than the stress rate with the addition of a buffer.”
“An interest rates rise, together with the projected rise in unemployment, could adversely impact borrowers and residential mortgage vintages originated in a low interest rate environment.”
Fluctuations in the Aussie dollar hold the key to further interest rates, according to leading economists.
The Reserve Bank board at its August meeting cut the cash rate to 2.5% and is leaving open the possibility of further cuts.
The minutes of the RBA meeting released yesterday indicated it will ‘’continue to examine data over the months ahead to judge whether its monetary policy is appropriately configured’.
It may be hoping the weakening dollar may do its work instead, and stimulate the economy by helping industries that have been struggling, such as tourism, manufacturing and the retail sector.
HSBC’s Paul Bloxham, chief economist Australia and New Zealand, says ‘’while the RBA has room to cut further, we still expect that they may not need to.
‘’Lower rates should gain further traction in the economy and the lower Aussie is also expected to help support growth.’’
New Limited’s Terry McCrann says the board is worried about a ‘’property bubble’’ and that the only stimulus that would come from even lower rates ‘’is to the second-hand property market and the bank accounts of real estate agents’’.
But he says the RBA ‘’is hostage’’ to what the US Federal Reserve does which will impact the US dollar and, indirectly, the Aussie. The right moves would see our dollar slide to the 80s ‘’and hopefully stay there’’.
He says that would rule out any further rate cuts.
Paul Bloxham and HSBC colleague Adam Richardson agree, saying the board has made it clear that moves in the Aussie are a critical part in policy setting, but that a further decline in the dollar is 'possible' and that it would help rebalance Australia’s economic growth, as the mining investment boom ends.
‘’ In our view, this month's rate cut may be the last for this easing cycle. Low policy rates are expected to gain further traction in the domestic economy, with the boost already provided to the housing market spreading to the broader economy in coming months.
‘’The election on September 7 should help this process, as it should help to remove uncertainty for businesses about the regulatory environment.
‘’The Aussie should also begin to provide support for key sectors of the Australian economy, given its fall in recent months, although the lower dollar will lift inflation.
‘’However, a rising dollar is a risk to the view that the easing phase of the rates cycle may be done.
‘’In our view, this month's rate cut may be the last for this easing cycle, though this relies on our forecast that the Aussie will edge lower, rather than higher, over coming quarters.’’
HSBC expects the Reserve Bank of Australia will keep interest rates on next week.
“We expect the RBA to hold the cash rate steady next week at 2.50%,” says chief economist Paul Bloxham.
“We expect confidence to improve after the federal election, on 7 September, though clearly there is considerable uncertainty regarding this outlook.
“The RBA’s next move is somewhat reliant on the AUD: a lower AUD would make further rate cuts less likely. In our view, the RBA would be more comfortable with the AUD closer to USD0.85.”
He says low rates are supporting the housing market but a broader rebalancing of growth is still yet to be seen.
He finds house prices are up 6.5% from their May 2012 trough and mortgage rates are at their highest levels in three years but it’s not quite enough.
“Outside of housing, there are, as yet, few signs of growth rebalancing,” he says.
He finds consumer sentiment has ticked up a little in recent months but remains around its long-run average.
And retail sales have weakened in recent months after showing some improvement earlier in the year. Business conditions and confidence also remain weak.
“Despite low interest rates and a declining AUD, businesses are unhappy. Part of this story seems to reflect political uncertainty, and concerns about the tax and regulatory environment,” Bloxham says.
“As a result, businesses remain generally unwilling to commit to large investment and hiring decisions.
“It may take time before the impact of the lower AUD flows through to firms’ willingness to make investment decisions. We do, however, expect that a broader rebalancing of growth will occur in time.”
While Prime Minister Kevin Rudd may be hoping for another rate cut on Tuesday to help boost his election campaign before next weekend, the Reserve Bank is unlikely to oblige.
The overwhelming consensus among economists is that the RBA will leave the official cash rate on hold at 2.5 per cent, its lowest point since 1959.
After cutting the official cash rate 225 basis points since November 2011, with the most recent cut last month, the RBA is likely to wait for the cuts to trickle down through the economy.
It's going to be ''a non-event from the RBA'', Deutsche Bank economist Phil O'Donaghoe said.
''[What was] extraordinarily clear from the RBA minutes is that they didn't want to send a signal to the market that a rate cut was imminent.''
Interest rate futures are pricing in just a 7 per cent chance of a rate cut on Tuesday.
However, the chances of a rate cut increase drastically in November are moving out to 60 per cent while the chances of a December rate cut is running at 76 per cent.
While predicting the RBA will hold fire this month, Macquarie economist Gabby Hajj said the investment bank was expecting two more cuts this year in October and December if employment, retail trade and business confidence continued to weaken.
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