The Reserve Bank of Australia responds to lower house prices

The economic world has been shifting its center of gravity eastwards for a while now as countries like India and China grow in both population and economic terms. However as we look towards the Orient we have been seeing some both familiar but troubling developments as 2019 has progressed. For example on April 4th I looked at what was the second interest-rate cut made by the Reserve Bank of India this year. This morning has seen the arrival of the Australian interest-rate cavalry as we see more such moves in the East.

At its meeting today, the Board decided to lower the cash rate by 25 basis points to 1.25 per cent. The Board took this decision to support employment growth and provide greater confidence that inflation will be consistent with the medium-term target. ( Reserve Bank of Australia or RBA)

Regular readers will not be surprised as on April 2nd I warned about the money supply situation.

 If we look ahead and use the narrow money measures that have proved to be such a good indicator elsewhere we see that the narrow money measure M1 actually fell in the period December to February……… Thus the outlook for the domestic economy remains weak and could get weaker.

This is another theme of the credit crunch era as central banks respond to events rather than anticipating them. They have often been given a free pass on this but the RBA is in timing terms way off the pace as the money supply has been slowing for a while.

RBA

If we look at the statement we can see what was behind this morning’s move. First what is Australian for johnny foreigner?

Growth in international trade remains weak and the increased uncertainty is affecting investment intentions in a number of countries.

That has become a central banking standard which means that it is a zero sum game as we all blame each other.

Something else that has become familiar is rhetoric that makes you wonder why they have cut interest-rates at all? And in fact would fit better with a rise in them.

The central scenario remains for the Australian economy to grow by around 2¾ per cent in 2019 and 2020. This outlook is supported by increased investment in infrastructure and a pick-up in activity in the resources sector, partly in response to an increase in the prices of Australia’s exports……..Employment growth has been strong over the past year, labour force participation has been increasing, the vacancy rate remains high and there are reports of skills shortages in some areas.

This is even odder as we remind ourselves that so many central bankers are telling us that economies have a speed limit of 1.5% annual economic growth these days. So Australia is cutting interest-rates because it is going to exceed it which is bizarre. Perhaps it is time for Mariah Carey.

Sweet fantasy (sweet sweet)
In my fantasy
Sweet fantasy
Sweet, sweet fantasy

Later we get something else of concern which is that we are being led to believe that this is to enhance a boom rather than help with a slowing.

Today’s decision to lower the cash rate will help make further inroads into the spare capacity in the economy. It will assist with faster progress in reducing unemployment and achieve more assured progress towards the inflation target.

House Prices

The reality is that like so often the central bankers are in fact worried by the housing market.

The adjustment in established housing markets is continuing, after the earlier large run-up in prices in some cities.

Note that they discuss falls as an “adjustment” and try to keep attention on the “large run-up”. But even they have to make some sort of admittal.

Conditions remain soft, although in some markets the rate of price decline has slowed and auction clearance rates have increased. Growth in housing credit has also stabilised recently…….. Mortgage rates remain low and there is strong competition for borrowers of high credit quality.

As ever these statements reveal the most with their omissions. For example housing credit must have dropped for it to be described as “stabilised” and “strong competition” for high credit borrowers means that there no longer is for lower credit borrowers. Oh and the plan is for mortgage rates to get lower.

Mortgage Rates

If we pursue the lower mortgage rates argument our theme of lower bond yields in 2019 is also in play. The RBA put it like this.

Long-term bond yields and risk premiums are low. In Australia, long-term bond yields are at historically low levels.

If we look at what has been happening we find ourselves shouting timber! This is because the Aussie bond market has surged so much that the ten-year yield has dropped from 2.75% in early November last year to 1.5% today. So if you have been long Aussie bonds well done. But as you can see there is a large push downwards for fixed-rate mortgage costs.

Commodity Prices

These continue to support the Australian economy as yesterday’s RBA update makes clear.

Preliminary estimates for May indicate that the index increased by 0.5 per cent (on a monthly average basis) in SDR terms, after increasing by 2.7 per cent in April (revised)………Over the past year, the index has increased by 12.6 per cent in SDR terms, led by higher iron ore, LNG and, beef and veal prices. The index has increased by 18.3 per cent in Australian dollar terms.

Money Supply

This has worked well as an indicator and there was some better news in April as the narrow measure grew by 2.9 billion Aussie Dollars and returned to annual growth in seasonally adjusted terms of 1.4%. So we learn that the RBA does not seem to place much weight on these numbers as it has ignored a period where there have been falls and cut rates when maybe it looks a bit better.

From our point of view the indicator has worked well and suggests continued slow growth rather than any collapse so Australia looks like it will avoid a recession, although after a quarterly growth reading of 0.2% at the end of 2018 it may get tight. But we need to stick to the broad sweep as I note the specific numbers keep being revised.

Comment

You are probably wondering what house prices are so let me hand you over to this from news.com.au yesterday.

The monthly report card from data firm CoreLogic showed the drop in national dwelling values slowed from 0.5 per cent to 0.4 per cent in May, primarily driven by a slower rate of decline in Sydney and Melbourne……….National property prices have slid 7.3 per cent nationally over the past 12 months, including homes in the major capital cities dropping by 8.4 per cent in value.

I have spared you the rhetoric from the vested interests as we note that these are the sort of falls to concentrate the mind of any central banker. But as we recall this we see that the establishment is operating in a range of areas to limit the decline.

This, combined with the Australian Prudential Regulation Authority easing access to finance will stimulate the sector.

Next comes the issue of being the South China Territories at a time of a trade war where the trolling is being stepped up. From @LiveSquawk.

China Warns Citizens Of Possible Harassment By US law Enforcement Bodies – China State Media

So far the commodity prices that are of Australian interest have not been affected indeed the reverse as we noted above. So there is a clear risk here which is maybe why I note this just being reported.

RBA’s Lowe: It Is Not Unreasonable To Expect A Lower Cash Rate

The deeper problem is that in line with what used to be called the liquidity trap interest-rate cuts at these levels have not helped other much and may in fact have made things worse.

 

12 thoughts on “The Reserve Bank of Australia responds to lower house prices

  1. Australia avoided the worst of the financial crisis a decade ago but no economies can continue to improve forever not when various commodities need to be shared worldwide.

    Trumps tariffs have now caused China to threaten supplies of real earth minerals the situation will get worse imo.

    Lets face it assets have ballooned all over the world the last decade or more fuelled by debt as some time the balloon was bound to burst!

    I keep saying the red flags are flying and there are more red flags in the last day. Neil Woodford has suspended his flagship fund and Kent council will be non too pleases after wanting to withdraw over £250 million of its pension assets!

    https://www.dailymail.co.uk/news/article-7100867/Thousands-savers-denied-access-money-fund-manager-blocks-withdrawal-cash.html

    https://citywire.co.uk/funds-insider/news/there-are-many-casualties-of-neil-woodford-s-downfall/a1235202

    Conclusion:

    Is the house of cards ready to collapse?

    • What exactly did people expect? The fund had large holdings in small illiquid and sometimes UNLISTED shares, did they expect him to be able to sell them to cover redemptions of this magnitude? -(Kent council’s pension fund asked for its £250m back!!!)no they just expected the unit price to keep going up because like shares and houses that’s what always happens right?

      So to the issue of a falling unit price, and people are naturally all trying to head for the exit at the same time. His fund has already lost about 60% from its peak, and this brings to the fore the issue of fund managers being allowed to sell high risk small company funds as seemingly safe sounding “income funds” when they are clearly the polar opposite – it is a very speculative small companies fund(nowadays fund managers of income funds often use the so called “Barbell” approach, where most of the fund is invested in safer large, liquid high yielding shares(that provide the income) and a proportion is invested in small companies that are highly volatile and risky to provide the capital growth and some of these gains are used to bolster the income payouts, all is rosy when the economy is booming but it all soon unwinds when those small company’s start to run into trouble and often then their shares are hard to sell – especially in the kinds of size Woodford would be trying to unload, and even if he is able to meet the redemptions – usually achieved by selling the larger more liquid and therefore less risky shares , it means the risk profile soars as the smaller riskier shares then represent a much greater proportion of the remaining portfolio, and so the answer up until now, has been to close the fund to stop further forced sales.

      Rather worryingly, all this has happened with buoyant markets near all time highs, just try and imagine the mayhem and panic if markets were ever allowed to fall without the intervention of central banks.

      • kevin,

        Neil Woodford had a bit of bad luck taken a hit on a few companies that have been doing badly he is invested in Purple Bricks which has also collapsed.

        However as assets are overvalued all around the world built on debt it would be very worrying if a world recession triggered a sell off of shares and it was worse than the last financial crisis more funds would be in the same boat.

        Money isn’t safe wherever you put it these days if it isn’t at risk in a fund or shares if its banked its eroded and only bank deposits are guaranteed at various limits.

        • Bad luck my foot, Peter. He’s a professional investment manager . I have bad luck; he makes bad decisions. But I agree the risks of relentlessly chasing yield and growth seem underrated . Nothing is safe. Does the FSCS have the resources to pay everybody out in the event of a major bank collapse? Or is the guarantee a ruse designed to thwart a run on the bank?
          And how much does this cast iron guarantee cost? Nothing!

  2. The RBA has the room to cut at the moment, the Bank of England hasn’t, and also has the problem of the collapsing pound to contend with, if BREXIT goes ahead as a No Deal, the pound will be decimated further and will be to Carney’s advantage (to punish the leavers and put political pressure to rejoin), as to the housing market, deeply negative rates are on the way over here, with further massive QE forcing down gilt yields to support the mortgage market, the RBA’s medicine has worked in that the shares of the big 3 banks ANZ,NAB,WBC haven’t broken down yet.

    • Hi Kevin

      It can cut but at these levels I am unconvinced that it makes much difference. Also it tells us what they are really thinking and gives us another clue that 2019 is not going as well as they forecast. As to the currency the Aussie Dollar has been slip sliding away versus the US one since the beginning of 2018 when it was at 1.24 as opposed to the 1.42 now.

      Your comment made me look up the UK Pound £ exchange rate and we are up around 3% on a year ago versus the Aussie $. But we did not have a good May losing 6 cents or so from the peak.

  3. My question is why all of the central banks are following the same methodology? All of them seem fixated on keeping house prices high regardless of the damage to the real economy or working people’s incomes.

    Their members are not stupid, they’re not lazy and they’re not inexperienced in economics so why isn’t there more intellectual curiosity?

    • Because they are all classical economists that believe the amount of debt in the system doesn’t matter and banks only act as intermediaries in the markets not influencing borrowers or prices!!! If you think that sounds crazy and could not possibly be true, look for Steve Keene’s videos on YouTube, there are lots – where he explains the insanity of their thinking, they are also full blown Keynesians, thinking that times like this require fiscal or monetary stimuli, ignoring the fact the economy is on its knees, inflation is high but undermeasured and demand is falling because of too much debt, they want governments to either borrow to spend to stimulate demand or the general population to borrow to spend to stimulate demand(conveniently ignoring the fact that most borrowing has been to feed the housing bubble).

      The fact that all the backward thinking policies and illogical theories lead to more borrowing by individuals and governments and therefore benefits the their member banks with huge profits is I’m sure just a coincidence, as is the fact that no other economic theories or models that would threaten that cozy feedback loop will be tolerated.

      Because the whole debt money/fiat system is so extended that if house prices were to fail, the losses for the banks and the borrowers would be so enormous they could never recover, the amounts involved are greater than the last crisis in 2008 as debt has increased massively since then, many people think that a lot of banks are still insolvent and further losses would be the final straw for them, but central banks would be to blame if the whole economic system collapsed from falling house prices unless they can find other scapegoats(BREXIT or Trump’s failure to deliver trade deals anyone???)

      • If governments shouldn’t borrow at < 1.5%, when should they ?
        ( "never" is not even close to a real-world answer )

    • the second answer is that they saw what happened in 1929/30 Great Depression and saw that it was an asset deflation depression.

      so the thinking is that will not ever be allowed to happen again. Ever.

      the deliberate misrepresentation of inflation is part of the scheme or the asset inflation would have to be dealt with. I can’t recall the economist’s name but back in 2003 he opening stated that the public would be better off in assets as the CB are not going to allow another 1930’s asset depression.

      so far this seems to have panned out.

      As for the next crisis , well, sorry to point it out but the crisis hasn’t ended yet!

      IR will not rise

      I have posited that we’ll know if it worked by 2038 -/+ 3 years, assuming we don’t end up in a full blown nuclear war first . ( a conventional war maybe seen as one solution …..)

      forbin

      • forbin,

        “As for the next crisis , well, sorry to point it out but the crisis hasn’t ended yet! ”
        Well I suppose you are right if one takes into account QE is still continuing and debt levels and asset prices are way over what they should be.

        Didn’t someone mention in the last financial crisis the next one could be far worse than the one a decade ago?

        My memory a bit rusty but Australia managed to avoid the last recession and asset prices have continued to rise until lately and the next financial crisis could be far worse.

        I know some are saying the various governments will do whatever is needed to prevent another crisis but the tools are running out.

        Negative interest rates haven’t been tried in the UK yet and may be needed the next time despite some saying these don’t work.

        • Hi Shaun,

          If this video is to be believed then our Ozzie cousins have a few systematic issues to deal with….. under estimating expenses…over valuing income…what could go wrong?

          Cheers

          David

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