The RBA is still clinging to the expectation that low rates will drive consumption growth in the future and that the increase in house prices is a big part of that.
This was the message from assistant governor Christopher Kent speaking at the Australian Business Economists lunch in Sydney yesterday.
“Low interest rates, and higher housing prices, have also lent support to the growth of consumption, which has picked up over the past year or so, notwithstanding the weak growth of incomes,” Kent told the gathering.
“The strength of this effect is most apparent in those states for which housing market conditions have been strongest, namely New South Wales and, to a lesser extent, Victoria.”
That feels very much like a dangerous liaison when the RBA is cheering Sydney housing as the economy’s saviour.
But as price growth slows, housing can’t do it alone and there has been a grand disconnect between consumption growth and expectations of consumption growth over the past few years which was first addressed by RBA governor Glenn Stevens in a speech titled The Cautious Consumer in July 2011 and followed up with The Glass Half Full in June 2012.
Indeed, the RBA was still grappling with what’s going on at a household level just last week in the breakout Box A “Housing Prices, Turnover and Borrowing” in its quarterly Statement on Monetary Policy.
The RBA asked the question as to why price rises in housing were not being accompanied by a lift in turnover of property and upgrading.
Amongst other things, the RBA wondered if this was because of the low rate of income growth or perhaps because Australians just simply aren’t interested in upgrading and taking on more debt.
It’s a question we put to Tim Hughes, Australian Securitisation Forum (ASF) chairman and treasurer of Suncorp Bank, on the sidelines of the ASF’s annual conference earlier this week.
Hughes told Business Insider that the caution he is seeing in the economy at the moment is reflective of a change in the collective psyche toward debt:
“Australians have become more conservative and appear less likely to gear to the extent they have in the past.”
He added that he thought a large part of this was the “aging of the population and lifecycle impacts” on borrower behaviour.
It helps explain why Australians are paying down their debt so aggressively, why the savings rate is still high and why consumption growth has failed to kick on in the manner that the RBA clearly hoped – and still hopes – it would.
A focus on debt also explains why any threat is magnified and why, for many Australian Australians, the glass is half full.