Both money supply growth and house prices look weak in Australia

The morning brought us news from what has been called a land down under. It has also been described as the South China Territories due to the symbiotic relationship between its commodity resources and its largest customer. So let us go straight to the Reserve Bank of Australia or RBA.

At its meeting today, the Board decided to leave the cash rate unchanged at 1.50 per cent.

At a time of low and negative interest-rates that feels high for what is considered a first world country but in fact the RBA is at a record low. The only difference between it and the general pattern was that due to the commodity price boom that followed the initial impact of the credit crunch it raised interest-rates to 4.75%, but then rejoined the trend. That brought us to August 2016 since when it has indulged in what Sir Humphrey Appleby would call masterly inaction.

Mortgage Rates

However central bankers are not always masters of all they survey as there are market factors at play. Here is Your Mortage Dot Com of Australia from yesterday.

The race to raise interest rates is on as two more major lenders announced interest rate hikes of up to 40 basis points across mortgage products.

According to an Australian Financial Review report, Suncorp and Adelaide Bank have raised variable rates of investor and owner-occupied mortgage products to compensate for increasing capital costs.

Adelaide Bank is hiking rates for eight of its products covering principal and interest and interest-only owner-occupied and investor loans.

Starting 07 September, the rate for principal and interest mortgage products will increase by 12 basis points. On the other hand, interest-only mortgage products will bear 35-40 basis points higher interest rates.


This follows Westpac who announced this last week.

The bank announced that its variable standard home-loan rate for owner occupiers will increase 14 basis points to 5.38% after “a sustained increase in wholesale funding costs.”

A rate of 5.38% may make Aussie borrowers feel a bit cheated by the phrase zero interest-rate policy or ZIRP. However a fair bit of that is the familiar tendency for standard variable rate mortgages to be expensive or if you prefer a rip-off to catch those unable to remortgage. Your Mortgage suggests that the best mortgage rates are in fact 3.6% to 3.7%.

Returning to the mortgage rate increases I note that they are driven by bank funding costs.

This means the gap between the cash rate and the BBSW (bank bill swap rate) is likely to remain elevated.

That raises a wry smile as when this happened in my home country the Bank of England responded with the Funding for Lending Scheme to bring them down. So should this situation persist we will see if the RBA is a diligent student. Also I note that one of the banks is raising mortgage rates by more for those with interest-only mortgages.

Interest Only Mortgages

Back in February Michele Bullock of the RBA told us this.

Furthermore, the increasing popularity of interest-only loans over recent years meant that by early 2017, 40 per cent of the debt did not require principal repayments . A particularly large share of property investors has chosen interest-only loans because of the tax incentives, although some owner-occupiers have also not been paying down principal.

So Australia ignored the view that non-repayment mortgages were to be consigned to the past and in fact headed in the other direction until recently. Should this lead to trouble then there will be clear economic impacts as we note this.

As investors purchase more new dwellings than owner-occupiers, they might also exacerbate the housing construction cycle, making it prone to periods of oversupply and having a knock on effect to developers.

In central banking terms that “oversupply” of course is code for house price falls which is like kryptonite to them. Indeed the quote below is classic central banker speak.

 For example, since it is not their home, investors might be more inclined to sell investment properties in an environment of falling house prices in order to minimise capital losses. This might exacerbate the fall in prices, impacting the housing wealth of all home owners.

What does the RBA think about the housing market?

Let us break down the references in this morning’s statement.

Conditions in the Sydney and Melbourne housing markets have continued to ease and nationwide measures of rent inflation remain low. Housing credit growth has declined to an annual rate of 5½ per cent. This is largely due to reduced demand by investors as the dynamics of the housing market have changed. Lending standards are also tighter than they were a few years ago, partly reflecting APRA’s earlier supervisory measures to help contain the build-up of risk in household balance sheets. There is competition for borrowers of high credit quality.

Sadly we only have official data for the first quarter of the year but it makes me wonder why Sydney and Melbourne were picked out.

The capital city residential property price indexes fell in Sydney (-1.2%), Melbourne (-0.6%), Perth (-0.9%), Brisbane (-0.6%) and Darwin (-1.1%) and rose in Hobart (+4.3%), Adelaide (+0.5%) and Canberra (+0.9%).

You could pick out Sydney on its own as it saw an annual fall, albeit one of only 0.5%. Perhaps the wealth effects are already on the RBA’s mind.

The total value of residential dwellings in Australia was $6,913,636.6m at the end of the March quarter 2018, falling $22,498.3m over the quarter. ( usual disclaimer about using marginal prices for a total value)

As to housing credit growth if 5 1/2% is low then there has plainly been a bit of a party. One way of measuring this was looked at by Business Insider back in January.

The ABS and RBA now estimate total Household Debt to Disposable Income at 199.7%, up 3% on previous estimates,

The confirmation that there has been something of a party in mortgage lending, with all the familiar consequences, comes from the section explaining the punch bowl has been taken away! Lastly telling us there is competition for higher credit quality mortgages tells us that there is not anymore for lower quality credit.


If we look for unofficial data, yesterday brought us some house price news from Business Insider.

Australian home prices fell for an eleventh consecutive month in August, led by declines in a majority of capital cities.

According to CoreLogic’s Hedonic Home Value Index, Australia’s median home price fell 0.3%, adding to a 0.6% drop recorded previously in July.

That took the decline over the past three months to 1.1%, leaving the decline over the past year at 2%.

That is not actually a lot especially if we factor in the price rises which shows how sensitive this subject is especially to central bankers. If we look at the median values we perhaps see why the RBA singled out Sydney ( $855,000) and Melbourne ($703,000) or maybe they were influenced by dinner parties with their contacts.

This trend towards weaker premium housing market conditions is largely attributable to larger falls across Sydney and Melbourne’s most expensive quarter of properties where values are down 8.1% and 5.2% over the past twelve months.

Another issue to throw into the equation is the money supply because for four years broad money growth averaged over 6% and was fairly regularly over 7%. That ended last December when it fell to 4.6% and for the last two months it has been 1.9%. So there has been a clear credit crunch down under which of course is related to the housing market changes. This is further reinforced by the narrower measure M1 which has stagnated so far in 2018.

Much more of that and the RBA could either cut interest-rates further or introduce some credit easing of the Funding for Lending Scheme style. Would that mean one more rally for the housing market against the consensus? Well it did in the UK as we move into watch this space territory.

Also this slow down in broad money growth we have been observing is getting ever more wide-spread,



18 thoughts on “Both money supply growth and house prices look weak in Australia

  1. Steve Keen has made some brilliant observations and some rather frightening predictions for the Australian economy over the years- see his numerous videos on you tube, here’s a recent one, at 18 mins he explains why, check out the graph at 19 minutes for the UK’s debt to GDP over the years and when it suddenly changed.

    • If Keen was running the Australian economy the over leveraged would be having their debt wiped out and getting free houses gifted to them.

      And savers would be paying for it, never understand the salivating over this glorified school teacher..

      • “And savers would be paying for it, ”
        As opposed to the current ZIRP scheme where savers have been pay the mortgage of housebuyers for the last nine years by receiving almost zero interest and in fact NEGATIVE rates when inflation is taken into account???

        If you followed him, his proposed debt forgiveness programme rewards savers by giving them exactly the same amount of money as those debt monkeys that have helped destroy our economy,the difference is savers keep the money, and debtors have to use it to pay down their debt, it also has measures to ensure housing bubbles don’t occur again.

        • The problem I have with Keen’s debt jubilee is that if it’s to be of any use it has to be a significant sum and that would most likely be unaffordable. The only way it’s likely to be affordable is if it’s small and that means it’s ineffective.

          On the other hand debts that can’t be repaid won’t be.

          • If we are going to have a debt jubilee can we hold fire for a few weeks while I fill my boots …….

        • It would destroy the currency, it is a truly ridiculous proposition and he is an absolute fool to suggest it. This leather jacket wearing school teacher is a money printing fanatic.

          He wants to destroy peoples savings in one swoop and give them some more of this ruined currency to replace it with. He really ought to go to Zimbabwe or Venezuala to see his economics in action.

  2. Slightly off topic, but the comments above about debt make me think that
    1. The only people in the long run who benefit from all this are, guess who, the banks
    2. The borrowers feel bitter because the colossal prices demanded for property
    3. Savers feel bitter because they see no return on their savings.
    Irrespective of who is right, it seems very sad to me that this has created so much bitterness and division and, on a more economic note, how odd it is that the cost of your house is so extortionate/such an asset depending on where you are in life. It seems so unproductive and has indebted people to an astounding degree.

    • You might add in the resentment of the current generation of first time housebuyers or renters priced out of ever buying their own home.

  3. James,

    A lot of the blame in the 2008 financial crisis was put down to the “masters of the universe” partly due to fraudulent and greedy bankers selling duff mortgages to naïve consumers, but it did bring banks to their knees many collapsed. So in effect the bankers don’t win all at the time, so I have to somewhat disagree with your view.

    Some of the real winners are astute people who have the cash to buy a company which has been bought out of administration for a song. Philip Day is one such man, he was brought up in a council house a very shrewd guy now a billionaire.

    • Masters of the Universe:

      “In the US and UK, highly competitive banking markets squeezed traditional lending and placed bankers under intense pressure to reengineer their balance sheets in the search for additional profits, largely in highly leveraged mortgage-backed securities trading. The origins of the financial crisis can be traced back to losses in these markets in the US. It was the collapse of these markets that triggered the banking crisis which began in 2007. Such market structures and pressures were pronounced and strong in the US and UK, but weaker in the Australian and Canadian markets. This is why the latter banking systems did not implode.”

      “highly leveraged mortgage-backed securities trading.” (duff mortgages)

      • Toxic debt irresponsible lending and irresponsible borrowing and its still going on that is why many see another financial crisis just around the corner. The Global growth has been built upon too much debt which is now getting unsustainable.

    • I probably phrased it badly as I see your point.
      What I really meant was two separate things
      1. The banks have been rescued from utter oblivion by the effect of QE and other measures to protect house prices
      2. Individual bankers in the UK still seem to earn disproportionately high salaries and bonuses despite the fact that their banks owe their existence to the government or CBs.
      Completely off topic, but I’m in the USA this week and Fox news’ main economic interviewee this morning said that the real worry to watch wasn’t Argentina or turkey but the European banks which he saw as extremely vulnerable.
      Perhaps he’s been reading this blog!

  4. Shaun
    You said:
    “Another issue to throw into the equation is the money supply because for four years broad money growth averaged over 6% and was fairly regularly over 7%. That ended last December when it fell to 4.6% and for the last two months it has been 1.9%. So there has been a clear credit crunch down under which of course is related to the housing market changes. This is further reinforced by the narrower measure M1 which has stagnated so far in 2018.

    All things being equal less money supply should equal less inflation, quite a decrease from 6 to 7% broad money supply, to lately 1,9% that suggests to me more property falls to come.

    • Hi Peter

      The broad rule of thumb is that broad money growth leads into nominal GDP growth which works as long as you do not take it too literally. Oh and you do not target it via Goodhart’s Law. Moving onto Australia broad money contracted last December by 0.6% dragging the annual growth rate from 6% to 4.6% and it has been slipping away since. As to the narrower measure (M1) then it was $358 billion in July last year and $356.8 billion this July.

      If we break down the numbers for credit to housing then lending growth to owner occupiers has changed little. But lending to investors ie. Buy 2 Let has fallen from a growth rate of 5% to 1.5%.

      So the monetary brakes have been applied…..

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