Property struggles back, with an eye on the RBA

10/03/13 6:55 AM

Christopher Joye

Property struggles back, with an eye on the RBA

PUBLISHED: 09 Mar 2013 PRINT EDITION: 09 Mar 2013

Christopher Joye Australias housing recovery, which is seven months young, is solidifying. The question is how hard and long it will run. In January last year I wrote that if the Reserve Bank of Australia cut rates again, one could expect the rebound in this interest rate-sensitive sector to accelerate. Unfortunately for real estate speculators, the monetary policy mandarins did not come to the party until four months later. While the easings in November and December 2011 brought the central banks cash rate back to a more neutral, or non-contractionary, threshold, the big banks did not play ball. Most economists predicted the RBA would cut rates again in February 2012 (yours excepted). Yet it shocked the market with a decision to pause. Three of the four major banks expressed their displeasure at not being able to claw back margins with prompt out-of-cycle hikes of about 10 basis points. ANZ had two bites at the cherry, lifting rates by a total of 12 basis points. With banks dulling earlier policy easings, Australias housing market did not get any real relief until the RBAs hefty 75 basis point cuts over May and June. The response was almost immediate: home values in most Australian cities began appreciating in June last year. Since then they have risen about 4 per cent across the five major capital cities, with better growth again in Sydney, Melbourne and Perth. Additional cuts in October and December ensured that the cost of housing has accelerated more rapidly this year. Based on the latest data to March 7, Australian dwelling values have climbed more than 2 per cent already in 2013. The sturdiest capital gains have been registered along the east coast, with home values in Brisbane and the Gold Coast jumping more than 3!per cent. In Sydney and Melbourne home owners have benefited from capital growth of 2 to 3 per cent. The only city that seems to be struggling is Adelaide, where house prices continue to deflate slightly. It is nevertheless unlikely we will have a repeat of the early 2000s, wherein double-digit credit growth fuelled an explosion in asset prices. In the second chart, RP Data has taken 11.6 million residential transactions since 2000 to measure the housing markets actual winners and losers each month. Observe that only 2.5 per cent of all vendors realised capital losses back in 2003 (notably before transaction and holding costs). After the exceptional boom at the beginning of the decade the share of losers has steadily expanded to a peak of 13.4 per cent of all sales last year. The good news is that the cheapest mortgage rates in history are helping the housing worm turn. The proportion of home owners making money is increasing for the first time since the RBAs emergency 3!per cent cash rate drop in 2009 ignited a mini-boom.
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Property struggles back, with an eye on the RBA

10/03/13 6:55 AM

The outlook for this phase of the housing cycle hinges critically on what the RBA does with its policy instrument. And make no mistake, the central bank is in a bind. Even though the main reason we have low inflation in Australia is because of our vaulted currency, the vocal commercial interests on the RBAs board appear to have convinced the staff that the strong Aussie is a now bad thing. The RBA has gone from doggedly defending the currencys level to describing it as overvalued. This is bizarre given recent Freedom of Information disclosures show that the RBAs own internal analysis finds that the trade-weighted currency is actually about right. In particular, the RBAs fair value estimates range from 20 per cent undervalued to 13 per cent overvalued. CBA strategist Richard Grace says, It is difficult to draw the conclusion the RBA believes the real exchange rate is overvalued. In fact, the RBA states in the documents that it is not clear that the Aussie dollar is substantially overvalued. Grace notes that since this analysis was completed key valuation variables have moved in a direction that implies the currency is even cheaper. Notwithstanding this, the RBA is eager to avoid anything that will place upward pressure on the exchange rate. This is one reason why its easing bias remains intact. While some houses, such as Macquarie Bank, are clinging to their remarkably low 2 per cent cash rate calls, it is hard to see the case for more rate relief. Indeed, the question housing investors should be focused on is: when will the RBA muster the courage to normalise policy? For a while now Ive argued that borrowing rates are near or below record lows. The RBA has not, however, bought into this perspective, and it pushed the line that rates were only a bit below average. Some economists have also pointed out that the neutral cash rate may have declined. Yet Martin Place seems to have changed its mind. The RBA now officially concedes the cost of debt is well below its longer-run average. Barclays chief economist Kieran Davies highlights that in the RBAs latest statement of monetary policy it published an estimate of the weighted-average interest rate on all outstanding loans for the first time. This is only a touch above the emergency lows of 2009. The RBA now thinks policy is almost as easy as it was during the GFC, Davies says. Before bequeathing crisis-level borrowing rates, economic growth in the year to September 2012 was at its long-term trend rate. Today, consumer confidence is above average and the resources boom is looking more durable than the RBAs assessment at the end of last year. So what could trigger an overdue shift in rhetoric? Watch the jobless rate. Economists and the RBA forecast it will drift towards 6 per cent. While I think there is scope for it to soften in the near term, I suspect it could start falling again in 2013. This would be a game-changer. An unambiguous decline in the jobless rate, propelled by an ageing population that shrinks the pool of productive labour, will force the RBA to remove its extreme stimulus.

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Property struggles back, with an eye on the RBA

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