The RBA cut rates in February because the Australian economy is weak, growing below trend, and the board wanted to nudge the Aussie dollar lower.
Since then the data flow has suggested that the economy, especially the business sector, remains mired in the economic mud unable to cope with the end to the mining boom. It’s a reality that has lead Paul Dales of Capital Economics to forecast a rise in unemployment to 7.5% and a series of RBA rate cuts dropping rates to 1.5%.
I have great sympathy with Dales’ view. I agree the economy is weak and I believe that rates will eventually head to 1.5%.
But I don’t believe that the RBA should cut rates today or indeed at any time soon unless or until it can rein in the rampant housing market.
What is clear is that monetary policy has lost traction where it used to work. That is, Australians are saving, not spending, their windfall gains from lower interest rates. They are paying down their mortgage or other debts.
At least that’s some of the population.
The other part of the population, investors increasingly, are happily borrowing at super low rates to buy more property. Low rates mean they can qualify for a bigger loan and thus borrow more. Given the nature of the tax treatment of investment housing, a bigger loan means a bigger tax shelter.
So is it any surprise that house price growth is surging – especially in Sydney? No.
Yesterday, Core Logic released its February Hedonic Home Value Index which showed a gain of 1.4% in Sydney house price in the month. That takes the year on year gain to 13.7% and the rally from the market trough to 34.8%. That’s huge and while you’ll hear arguments that the rest of the country is lagging, Melbourne house prices were up 4.5% in the quarter to February and are up 7.4% year on year.
Sure, the focus on Sydney and Melbourne irks some. But the divergent price moves for Perth could be a cautionary tale in the making.
Perth prices fell 2.2% in February, they fell 0.9% in the three months to Febraury, and are only up 0.6% year on year.
But perhaps its about value? With a median dwelling price just 5,000 less than Melbourne and a post-boom economy slowing, maybe Perth is showing the risks the rest of the economy faces as the prices retreat in what appears to be a post-boom give back.
With this in mind yesterday in my Go Markets Asian trading wrap, I wrote:
Can the RBA cut tomorrow without housing going through the roof again.
The Australian economy is becoming dangerously obsessed with an unbalanced reliance on housing. Crucially for the long term health of the economy the house price rises are not feeding into consumption. So there is no net benefit to the economy as Australians take on more debt.
They, and the nation just get more levered.
It’s a theme echoed by Bank of America Merrill Lynch chief economist Saul Eslake who told the AFR that:
Neither economic nor social good would be done by a further surge in house prices from present levels.
It might make people feel better, but since people are no longer willing to borrow against gains in the value of their properties in order to spend more widely, there is no economic benefit, there’s no wealth effect. There is also social harm done by locking an increasing proportion of younger generations out of home ownership and widening the wealth gap between those who own a property and those who don’t.
In his statement after last month’s decision to cut rates, Governor Stevens said: “The Bank is working with other regulators to assess and contain economic risks that may arise from the housing market.”
With auction clearance rates surging back through 80% since the rate cut, with prices rallying once again, and with the economic risks to the economy growing, it’s time for the RBA to pause and get these regulations and its co-ordination with Australia’s banking regulator APRA working before it cuts again.
Because all the signs are it will need to cut again and Australia can’t afford a housing boom to destabilise the economy which is weak enough already.
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