Interest rates down, house prices up: RBA faces growing dilemma
Interest rates down, house prices up: RBA faces growing dilemma; Surge in house prices has put Reserve Bank governor Glenn Stevens between a rock and a hard place
Tweet Topic Started: 30 Sep 2013, 09:33 AM (1,268 Views)
The surge in house prices has put Reserve Bank governor Glenn Stevens between a rock and a hard place.
While the central bank's monthly interest rates decision grabs the most attention, its role is in fact far more complex than controlling the cost of credit.
Its ultimate duty is to maintain ''full employment, and the economic prosperity and welfare of the Australian people,'' alongside financial stability. And as the housing market heats up, possible tensions between these overlapping goals are emerging.
With capital city prices rising at their quickest pace in three years, the RBA this week signalled it remained on guard for signs of unsustainable property growth when interest rates are at record lows.
But aside from ''jawboning'' the market by reminding buyers to be ''realistic'' and telling banks to be sensible, its options are limited.
Few believe it can raise interest rates to take the heat out of the housing market, because this would risk hobbling the non-mining recovery.
And even though unemployment is expected to worsen in months ahead, Citi economist Paul Brennan says the hot housing market has now ''raised the bar'' for further rate cuts.
''The RBA has got a difficult balancing act here,'' he says. ''They want to nurse the economy through this period of falling investment, they want to rebalance the economy and they want housing to pick up.''
For more than a year, the RBA has been preparing the economy for the time when mining investment passed its peak, requiring us to find another growth engine.
The central bank expects the vast housing construction industry to play a central role. As more homes get built, it's hoped that other high-employing sectors such as retail and manufacturing will also benefit, as people build and furnish their new homes.
But as the property market gets stronger, with Sydney's annual price gains of 7 per cent a particular concern, the baton change from mining to housing is raising all sorts of tricky questions.
In NSW in particular, the price growth is being driven mainly by investors, who are far more likely to buy established homes. This has the effect of pumping up prices without generating as many positive ''spillovers'' as hoped.
Although the RBA has dismissed bubble talk as ''alarmist,'' the price growth has put authorities on guard to prevent unsustainable growth in prices.
It's a similar dilemma to one facing many Western countries grappling with the effects of very cheap credit on the biggest asset market of all: houses. In recent decades, whenever interest rates have fallen, it has been followed by a strong jump in house prices.
In the early 2000s, the Reserve responded by progressively raising rates from 4.25 per cent in 2001 to 7.25 per cent in 2008. Bank of America Merrill Lynch chief economist Saul Eslake says this distinguished the RBA from its peers.
''One of the only reasons that we did not have a housing and financial crisis in 2008-09 was that the Reserve Bank was just about the only central bank in the Western world that did not keep interest rates low for too long in the early part of last decade,'' he says.
But this time, there are doubts over whether it can use interest rates to rein in a red-hot housing market. After all, such a move would likely push up the dollar that the Reserve already believes is higher than it should be.
Real estate agent Craig Stephens says he's having a ''funny spring'' out in Melbourne's western suburbs.
The so-called boom exploding in other parts of Melbourne and Sydney has yet to make itself felt in the west, despite the presence of investors.
''It looks like a late spring for us. The election has acted like a bit of an interest rate cut and there's been a real spike of interest since the election. But we think there's going to be a wave of listings to hit in November rather than October,'' says Stephens, a former stockbroker who runs the family real estate agency Jas H Stephens.
It's a different story in Sydney's outer north, where Belle Property agent Nick Bedford was caught on the hop at the start of the year when the market suddenly picked up after the Reserve Bank cut interest rates in October and December 2012.
''We didn't forecast this happening. It started in February. Winter is usually slower but it hasn't slowed all year,'' Bedford says. He says the area where he operates, in Beecroft and Cheltenham near the Pennant Hills Golf Course, has been doing well all year but not at runaway prices.
The family home he sold at 9 Welham Street in Beecroft last weekend attracted three bidders and sold at its reserve price of $2.2 million.
''That's the high end. There's only been one other sale above $2 million this year, but everything's going well, everything's transacting,'' he says.
In Sydney's inner west around Strathfield, Haus Real Estate's Reece Theedam says he's struggling to get enough stock to supply skittish buyers.
''We've had some ridiculous results, but we've had some hits and misses too. My question is, would there be the same clearance rate if there was a 20 per cent increase in stock?'' Theedam says.
Melbourne's inner suburbs of Brunswick and North Fitzroy and the traditional leafy eastern suburbs from Kew to Malvern are doing well after more than two years in the doldrums. Bayside has also recovered from a very stale patch.
But for every runaway auction with a sale 30 per cent above its reserve, there are plenty selling close to the mark or passing in and selling shortly after. These last are still counted as sales in the auction clearance rate.
Only 12 months ago, clearance rates were below 60 per cent and median dwelling values were treading water. The Reserve Bank slashed the cash rate twice in late 2012 and twice again in mid-2013 to help prime the economy, and it worked a treat on the property market.
Sydney clearance rates have been at or above 80 per cent for most of the year and Melbourne's have hovered around 70 per cent and are rising. Analysts RP Data reckon Sydney property prices have climbed 8.2 per cent in the past 12 months and those in Melbourne 5.3 per cent.
But stock levels remain low. RP Data research released during the week shows the total number of properties on the market is down 28.9 per cent in Sydney and by 13.8 per cent in Melbourne from the same time last year.
Frank Valentic, from Advantage Property, who acts for investors and home owners buying and selling property, says the number of investors on his books has doubled in the past 12 months.
''People have a herd mentality. When they see the market moving, they want to jump in. Investors were sitting on the fence last year. Home buyers will always need to upsize or downsize, but investors don't have to buy so they are looking at the timing and they see growth now,'' Valentic says.
About 25 per cent of his investor clients are buying for super funds.
The property growth cycle has started with demand surging, house prices on the rise and overseas buyers on their way, according to John McGrath, chief executive officer of McGrath Estate Agents.
Data from the McGrath Report, released this week, highlights several standout factors helping to buoy the market including increased property investment through self-managed super funds (SMSFs), significant infrastructure growth, low interest rates and an influx of Chinese investors.
SMSFs have increased their investment into residential property by 10.4 per cent in the past year, according to the report.
In addition, major infrastructure projects such as the Legacy Way Motorway near Toowong, the Brisbane CBD redevelopment which will include a 43-storey tower, the Southport Hospital and light rail, the Gold Coast 2018 Commonwealth Games and the Sunshine Coast University Hospital are all expected to improve values and demands in these areas.
McGrath says he expects interest rates to bottom for the remainder of the 2013 but start to rise in the second half of 2014.
As a result, he predicts 2014 will see continued residential property recovery Australia-wide, with several cities surging in demand and prices, including Brisbane.
Sydney is expected to lead the way but southeast Queensland will likely show the overall strongest growth market in Australia over the next three years, according to the report.
McGrath sees the housing market on the Gold Coast improving after being oversold and finally starting to recover from the global financial crisis. This is where retirees and empty nesters will come to make the most of still low prices and to enjoy a sea change.
The September Reserve Bank board meeting may have been little more than a token event given an election was just days away, but this week’s will carry more interest. However, despite the greater freedom it will have to act, most commentators think the board is unlikely to use it. The consensus remains that one more rate cut is still on the cards in the next few months, but will a housing bubble derail this school of thought?
Elsewhere, there’s plenty of discussion about the latest budget numbers, which weren’t as bad as expected. Despite this, one columnist warns that a budget black hole could still be lurking around the corner.
We start with interest rates. The Australian’s David Uren is confident the Reserve Bank will stay put on Tuesday, but not due to any concerns about perceptions of a housing bubble. Instead, it’s all about jobs.
“While the bank has adopted a fairly neutral stance, it has very deliberately not ruled out further rate cuts and would be concerned if the rise in unemployment looked like accelerating. But if a more buoyant housing market stimulates construction activity and lifts consumer confidence, the Reserve Bank would see it as monetary policy working precisely as it should. Rising house prices themselves won't stand in the way of further rate cuts, but their indirect benefit on jobs and growth might.”
The Australian Financial Review’s David Bassanese takes a similar line, noting that the threats to the economy still outweigh the risk of a house price boom.
“Despite mounting hysteria over house prices, indicators of consumer spending, business conditions and labour hiring still suggest the economy remains trapped in a below-trend rut, and the unemployment rate is destined to rise further ... Accordingly, I suspect the Reserve Bank will still retain a modest easing bias in its policy statement this week, holding out the prospect of even lower interest rates in coming months, should inflation stay low and unemployment rise further.”
Moving to the final budget numbers from last year, Fairfax’s Michael Pascoe is full of praise for the delivery of a deficit in 2012-13 being far smaller than it could have been. Treasury, he insists, is worthy of acclaim for reducing the deficit while avoiding recession in a turbulent political environment.
“After a deficit of $43.4 billion the previous year – 2.9 per cent of GDP – it is an unprecedented and utterly amazing fiscal contraction to be able to get it down to about $19 billion, 1.3 per cent of GDP. Thank heavens Wayne Swan didn't succeed in reducing it to zero – that way recession would have laid.”
Terry McCrann, writing for The Weekend Australian, takes a different focus by putting the spotlight on budget black holes. Are some lurking a couple of years down the track?
“In the more general sense, we know we've got a ‘budget black hole’. It's set out in all its blackish redness in the Pre-Economic Fiscal Outlook. If this year's deficit is now heading for $35 billion rather than $30 billion, that in itself is really not of great significance … The important question is not whether this year's deficit is $30 billion or $35 billion, but what next year now looks like; and how the bottom lines for the years after that are shaping up. We could well be facing real budget black holes.”
Sticking with Canberra, Fairfax’s Ross Gittins calls for Treasurer Joe Hockey to pursue bold budget reform rather than merely coasting into a position of being “better than the last lot”. The easy choice is rarely the best choice, after all.
BHP Billiton, meanwhile, has drummed up some news for its stance on executive pay. Terry McCrann, this time writing for the Herald Sun, notes just how complicated pay structures have become. And even with pay cuts ahead, the money that leading execs will receive is still at levels most people wouldn’t see in their lifetime.
Finally, Fairfax’s Malcolm Maiden talks retail – specifically, the closing of the price gap between David Jones, Myer and the online retailers. But while that problem is not as gaping as it appeared a year ago, retailers still have plenty of issues to deal with – not least of which is lacklustre sentiment.
The RBA does want construction but they are trying to get it going by increasing the price of houses. They have recognised that is the only way they have of doing it. I believe they have stated as much. They don’t believe we have a bubble in Australia at the moment so inflating it doesn’t bother them one little bit. The individual speeches given by RBA staff are not renegade speeches but reflect the attitudes and policies of the RBA.
I believe they will be caught in the conundrum of runaway house prices and a faltering economy. Bill Evans et al will keep up their relentless pressure for lower rates. If the RBA would ‘look through’ accelerating inflation (and I think we agree they would) why won’t they look through accelerating house prices especially since they consider we have nothing like a bubble?
I’m not trying to beat anyone with this. I’m just trying to interpret RBA behaviour. I think we’ll eventually get into an argument over whether the RBA are stupid or not. Have a look at our situation and the choices left to us and tell me whether they are stupid or not to let us get into this parlous state. Further as far as I’m concerned anyone who didn’t see the GFC coming is just plain stupid. The RBA didn’t have a clue and still don’t grasp what is really happening.
The RBA didn’t have a clue and still don’t grasp what is really happening.
maybe they do have a grasp and figure it's the best course of action all things considered. The longer we avoid recession the more shit (infrastructure) gets built. It's a logical move to keep a certain percentage of the economy insulated as much as possible from external occurrences and they have chosen to do so with housing. I would have liked to have seen them use a different vehicle but there aren't many options at this stage.
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