Rate cut? No way, RBA
There is a considerable cheer squad calling for another interest rate cut from the Reserve Bank, but even they do not expect anything to happen tomorrow. Michael Pascoe reports.PT4M16S http://www.canberratimes.com.au/action/externalEmbeddedPlayer?id=d-2ung7 620 349 September 30, 2013
The cheer squad a-wishin' and a-hopin' for another Reserve Bank interest rate cut is nothing if not persistent, even if they're reduced to advising the RBA to pretend to want to trim rates again. Too bad the squad is ignoring pretty much all the available evidence pointing to the central bank leaving monetary policy right where it is.
Even the cheer squad doesn't expect the RBA board to move rates at its meeting tomorrow, which is why the doves are just pleading for the bank to reinstate an explicit easing bias instead. There would be a little problem with that though: it would destroy the RBA's credibility.
It's a fairly simple matter to read the minutes of the September meeting and then ask: what has changed since September 3 and has that change made looser monetary policy more or less likely?
As you were: An interest rate cut is unlikely tomorrow. Photo: Glenn Hunt
When the minutes of tomorrow's meeting are released, they're likely to record that the economies of our key trading partners have mostly continued to improve. In particular, all the scaremongering about a hard landing in China has receded as a wonderful growth rate of about 7-and-a-half per cent is confirmed. The ripple of headlines about capital flight from some emerging markets has faded, helped somewhat by the US Federal Reserve's dithering over tapering. Europe's mess is no worse and is in some ways a little better, Italian politics notwithstanding.
The threat of financial market instability induced by a possible shutdown of the US government is there, but that doesn't scare us as much as it used. Having been to the brink before, the view over the edge isn't quite as scary. Besides, the threat is not without some benefit to us while it's credited with weakening the Aussie a touch.
So the international picture does not provide an argument for an easing bias, let alone an actual cut.
Domestically, the news also has been mostly positive while the negative bits were already factored in. The big transitional bet on domestic housing continues to head in the right direction as lower interest rates do their stuff – firming prices and thus encouraging more building, albeit not enough. And, as the RBA continues to remind us, it's still early days for the full impact of the last couple of interest rate cuts to work their way through the system. Besides, the RBA would look a little silly cutting rates again to further stimulate housing when it's also firing warning shots about lenders and borrowers being in danger of getting carried away. (Not that there is a bubble, far from it, as I'll get to just a little later.)
Yes, the labour market has remained soft, but that is as expected and no surprise. Indeed, the RBA credits a continuing weak labour market over the rest of this financial year with keeping inflation down even as the Aussie weakens. No surprise or change of outlook over the unemployment rate then.
Retail sales statistics also have been soft and tomorrow's ABS count of August sales won't be good, but industry liaison is likely to tell the board that there has indeed been an election-related pickup this month. The business and consumer confidence lift in anticipation of a change of government has carried through after the event.
(Heck, there have even been some unexpected bonuses with the AFR reporting that the government is scrapping the October 1 crackdown on some of the banks' tax avoidance games. And for a little while there, it seemed there might have been a whole new level of stimulus: classifying weddings costs as a business expense. The Attorney-General seems to think that's still a possibility.)
More importantly for the bigger policy picture, the Tweedle Dees of the new government are maintaining the same sort of stimulatory fiscal policy as the previous Tweedle Dums, so the risk of a negative shock there has receded.
Our banks are officially strong and have money to lend if people and businesses want to borrow more, which the confidence thing and the housing pickup should in time encourage them to do.
So all that lot points to rates remaining steady tomorrow and for quite some time. The only negative over the past four weeks has been the Australian dollar's rise on the Federal Reserve delaying the start of tapering – but that's about them, not really about us, and it is only a delay.
Thus tomorrow's should be one of the easier board meetings with the main interest for members not being about maybe trimming rates, but just what seeds have been sown for a rate rise sometime next year.
It is entirely reasonable for the RBA to fire warning shots when it spots potential problems developing – and it's wise to take heed of those warnings. Yet the extrapolation of those warnings and some prices rises into talk of a housing bubble has been somewhat inflated, so to speak. Inner-Sydney and Perth do not represent the entire Australian housing market, and even in those two distinctly warm geographies, all might not be quite what it seems.
Brisbane property analyst Michael Matusik is one of the calmer residential real estate voices, both on the way up and the way down. His latest post seeks to blow the froth off the bubble talk and is worth quoting at some length for a different perspective:
For the record, Sydney house prices are up 8.3 per cent over the past 12 months according to RP Data, but were up only 1.2 per cent last year and were down 2.4 per cent in 2011. As for the rest of the country, Perth is up 7.9 per cent for the year but down 0.5 per cent last month while Melbourne is up 5.4 per cent for the year and the Brisbane-Gold Coast region is up a measly 1.8 per cent.
Hmmm, a housing bubble indeed…It was just two months ago, when we were still waiting for Australia's housing market to bust. For mine, what we are experiencing is the normal machinations of the property cycle – nothing more, nothing less.
Valuations are often short at the recovery stage of the cycle. They sometimes overshoot near the peak. There are many issues regarding valuations in Australia.
One of the problems with house price reporting is the way prices are measured and more importantly what influences the rise (or fall) of both median and mean house price figures.
New development or redevelopment often causes the middle and average price to rise, without seeing resale values increasing much at all.
This is what often happens around key infrastructure, such as railway stations. New projects lift the median/mean values, whilst resale prices remain flat at the time of new development/redevelopment. The same can be said about weekly rents. Base property values/rents often rise faster closer to core infrastructure, but the overall residential cycle must be on the improve.
A similar trend can be found in many areas affected by flooding across Australia in recent years. Many of these areas, especially in Queensland, have now been redeveloped. This has seen new properties replace older stock. Median/mean values have often risen as a result. But many owners in these areas, who are trying to resell flood-affected but unimproved homes, cannot get much more for their property than they originally paid for it. They are often getting less than they most likely would have if they sold just prior to flooding.
Median and mean housing prices are also affected in the same way when it comes to individual house renovations.
Many areas across Australia are experiencing a renovation surge. Areas which are going through a swell of reno activity are seeing a strong lift in suburban median and mean prices. But when you factor in the cost of the renovation itself (and especially if you include your time at a commercial rate), then the true uplift in financial gain is far less than the headline suburban price growth being touted.
It is true that a high and consistent proportion of renovation work across many homes in an area is a good thing in terms of improving the underlying investment potential of a location. Such activity suggests that owners are 'placing money where their mouth is', so to speak, which in turn often leads to more owner-resident resale interest, which increases the actual size of the resale market and in due course can help get a much better price on resale. But it takes time for the base value of property in such an area to increase.
New development, large scale redevelopments and major renovation activity cause median and mean values to rise. But this isn't the same as seeing the base value of the existing, unimproved housing stock increase in a certain location.
When we see rapid increases in the base value of residential property, and across widespread areas, then we are experiencing boom-like conditions.
I suspect that – outside of certain areas in Sydney and Perth, maybe parts of Melbourne now – the base value of Australian housing isn't increasing much at all.
In any event, whether a housing bull or bear, the best way to prevent a damaging bubble arising is to increase supply. So, so hop to it, state and local governments.
Michael Pascoe is a BusinessDay contributing editor.