In precisely one week, property investors and home owners will again receive news as to whether their fiscal fortunes are on the up with an interest rate drop, holding steady with no change, or not quite so favourable with a rate hike.
The last two years have seen the Reserve Bank sitting in a very unique and uncomfortable position, walking a delicate wire between common sense, inflationary driven policymaking and the need to rein in certain segments of the real estate markets.
Recently, there have been further predictions from overseas analysts who believe our low interest rate environment and subsequent housing boom are setting us up for a similar bubble to that experienced in the likes of Ireland.
Of course, just as prevalent are the arguments coming from closer to home about why any type of significant correction is unlikely to occur any time soon, whether interest rates start to rise or not.
For what it’s worth, I generally take overseas commentary around Australian property markets with a good grain of salt. Why? Because most Americans don’t even know how to find us on a map, let alone the key market fundamentals that drive our economy and real estate sector.
However, when respected local commentators like Christopher Joye suggest that, “The RBA is blowing the mother of all housing bubbles to deflate an overvalued exchange rate,” it might be timely to pay attention.
So what ‘key fundamentals’ are Governor Stevens and his cohorts deliberating over when it comes to their current policymaking meetings?
What were some of the big-ticket items at the top of their boardroom agenda in March and what might be playing on their minds next week?
Oh and don’t worry…we’ll get back to Christopher Joye a bit later…
Global economic growth
First cab off the rank on March 3rd was the continued moderate rate of economic growth we’re currently seeing throughout most major world economies, and predictions that we can expect more of the same across 2015.
Things in China are still slow going, and meanwhile the US just keeps on keeping on in recovery mode, slowly finding its feet again.
Of course while we were busy celebrating lower petrol prices recently, the RBA was pondering what falling oil and other commodity prices might mean.
“These trends appear to reflect a combination of lower growth in demand and, more importantly, significant increases in supply,” they said in their March statement.
And we all know where that sort of supply and demand imbalance leads…
These were creeping up at the beginning of March, off the back of slower than anticipated domestic growth.
“The economy is likely to be operating with a degree of spare capacity for some time yet,” read the RBA’s March statement.
“With growth in labour costs subdued, it appears likely that inflation will remain consistent with the target over the next one to two years, even with a lower exchange rate.”
As has been the case for the past few months, the majority of credit applications received by lenders have been from investors looking to secure property.
The RBA reports a notable degree of inconsistency with our housing markets right now. While Sydney price growth remains strong and sustained, other suburbs haven’t been so reliable.
“The Bank is working with other regulators to assess and contain risks that may arise from the housing market.”
The Aussie dollar
Performing well against a host of other global currencies, but still declining against the strengthening ‘greenback’, our dollar currently sits above most estimates of its fundamental value.
This essentially means, “A lower exchange rate is likely to be needed to achieve balanced growth in the economy.”
Tellingly, the Reserve Bank’s March media release ends with a little teaser as to what we can expect over coming months, suggesting, “Further easing of policy may be appropriate over the period ahead, in order to foster sustainable growth in demand and inflation consistent with the target.”
The investor fundamental
Shaping up as an influencing market fundamental in its own right is the continuing deluge of property investors keen to snap up assets, particularly in the lucrative Sydney market.
A sustained spike in investor related borrowings is worrying the RBA, causing them to issue warnings about capping investor loan growth to ensure it doesn’t creep over 10 per cent and advising lenders that extra capital charges will be imposed on banks breaching this magical limit.
Experts suggest current lending data won’t be available when the Board meets next week however and as such, a more accurate assessment of this particular thorn in their side won’t be possible until at least May.
Alarmingly, the RBA is concerned that lenders enjoying the fruits of our booming Sydney market will ignore regulator threats, choosing to pay extra capital charges and continue selling more investment loans.
This potential inability to put a lid on investment lending, some suggest, could be the catalyst that undoes the RBA’s approach to interest rate-reliant policymaking.
Any Joye here?
I promised we’d get back to Christopher Joye and I’m a man of my word. Joye says the RBA, “is replacing one asset pricing conundrum with another, arguably far more dangerous, one” with “unprecedented monetary policy in the form of the cheapest borrowing rates in history to put downward pressure on the Aussie dollar.”
If we hadn’t all seen for ourselves, it would be hard to believe, but Joye claims the Reserve Bank kind of mucked up their forecasting.
He says they based their February decision to cut rates further on the assumption that the housing market was starting to cool (probably off the back of end of 2014 market data).
“Much like it thought rate cuts in 2013 would not fuel an unsustainable housing boom that would force regulators to introduce macro-prudential rules to slow credit growth running at three times the rate of incomes,” wrote Joye.
He claims what we are currently seeing with Australian property markets is unprecedented. His argument makes sense and seems logical.
Unprecedented interest rate environment, alongside unprecedented economic transition after unprecedented resources boom is going to cause, well, some unprecedented market responses.
“It (the RBA) has probably been blindsided by housing dynamics over the last couple of years because it has never confronted these conditions before,” says Joye.
“Back in 1991 the value of housing debt divided by disposable household incomes was just 35%. Today it is over 140% – beyond any previous peak.
“And climbing every day.”
So come next Tuesday, one thing’s for sure, Stevens and crew will once again be facing a difficult quandary, needing to counteract a continuing weak economy and the possibility of rising unemployment with the only thing in their arsenal right now…more rate cuts.
Something tells me that this very interesting time for our property sector is far from over.