I thought that today we would look at an economy via one of the priorities of central bankers, You can present all the economic output and GDP data that you like but they will be impatiently waiting to see what is taking place with house prices. After all rising house prices provide wealth effects and support the balance sheet of the banks in something of a central banking double whammy. If we journey to the other side of the world we see a country that had quite a bit of that as the resources boom meant it avoided any credit crunch recession but the party has ended and was replaced by something of a hangover being experienced. This has been illustrated by this morning’s official data release.
Residential property prices fell 0.7 per cent in the June quarter 2019, according to figures released today by the Australian Bureau of Statistics (ABS).
The falls in property prices were led by the Melbourne (-0.8 per cent) and Sydney (-0.5 per cent) propertymarkets. All capital cities apart from Hobart (+0.5 per cent) and Canberra (+0.2 per cent) recorded falls in property prices in the June quarter 2019……….Through the year, residential property prices fell 7.4 per cent in the June quarter 2019. Prices fell 9.6 per cent in Sydney and 9.3 per cent in Melbourne. Hobart (+2.0 per cent) was the only capital city to record positive through the year growth.
Grim news for any central banker as the report then thrusts a dagger in any central banking heart,
The total value of Australia’s 10.3 million residential dwellings fell by $17.6 billion to $6,610.6 billion in the June quarter 2019. The mean price of dwellings in Australia is now $638,900. The total value of residential dwellings has fallen for five consecutive quarters, down from $6,957.2 billion in the March quarter 2018.
Reserve Bank of Australia
Of course this was really painful for them and as I pointed out on the 2nd of July so painful that they could not actually bring themselves to say house prices were falling.
Conditions in most housing markets remain soft, although there are some tentative signs that prices are now stabilising in Sydney and Melbourne. Growth in housing credit has also stabilised recently.
But they could at least respond in boom,boom fashion.
At its meeting today, the Board decided to lower the cash rate by 25 basis points to 1.00 per cent. This follows a similar reduction at the Board’s June meeting.
Whilst they would have not know the full detail at the time the report below, especially the bit I have highlighted will have got their attention as reports came in.
The main contributors to the fall in the housing group this quarter are electricity (-1.7%), gas and other household fuels (-0.5%) and new dwelling purchase by owner-occupiers (-0.2%). This is the first quarterly fall for the housing group since the March quarter 1998, driven by lower electricity and gas prices, weak housing market conditions and increasing rental vacancy rates in some capital cities. ( ABS)
Credit Easing and Tax Cuts
The Australian authorities will have learnt from others experience that interest-rate cuts may be a necessary requirement for house prices to rise again but in the credit crunch era they are not sufficient so we got this too in July. From Reuters.
The Australian prudential regulator on Friday scrapped a minimum 7% interest testing rate for bank customers’ loan applications, adding to the stimulatory tools being deployed to revive the sluggish economy………..the government passed A$158 billion ($111 billion) worth of tax cuts to boost an economy that is threatening to stall.
Like elsewhere criticism of the banks only lasted as long as it took house prices to fall.
The changes also mark a softening of APRA’s more strident position on mortgage regulations that followed a scathing year-long public inquiry into banking sector misconduct.
These people are what you might call intellectually flexible. You see the household debt to disposable income ratio was 189.7% at the end of March as opposed to 157.5% a decade earlier. The housing debt to disposable income ratio has risen from 84.5% to 109.3% over the same time period.
What about now?
There must have been a huge sigh of relief at the RBA as this news came in. From today’s Minutes.
Established housing market conditions had steadied in recent months. Reported housing prices in Sydney and Melbourne had risen noticeably in August and auction clearance rates had increased further, although volumes had remained low.
What do they mean by that? Well here is new.au.com.
The national property market has recorded its largest monthly increase in more than two years as Australians capitalise on low interest rates, tax cuts and a slight loosening in lending standards.
The national market lifted 0.8 per cent over the last month.
Sydney had been at the centre of the downturn, but the New South Wales capital appears to be once again on the rise.
I hope the numbers are more accurate than the one later in their piece.
“One of the key considerations for policymakers is household debt levels remain around record highs, around 90 per cent of disposable income.”
Just the 100% short…
If we return to the RBA then it will be worried about the low volumes.
Housing turnover had remained low.
It will be much happier with this bit.
Variable mortgage rates had declined broadly in line with the reductions in the cash rate in June and July. Fixed mortgage rates had also declined substantially over the preceding six months.
Growth in housing credit had been little changed over the year to July, having declined steadily through 2018. Credit to investors had declined slightly over previous months. Meanwhile, housing loan approvals to both owner-occupiers and investors had increased for the second consecutive month in July.
Oh and in case you were wondering what mortgage rates are lets go back to news.au.com
You can now find advertised mortgage interest rates below 3 per cent. That’s an extremely cheap loan,
Let us now switch to the other matter that will be concerning the RBA.
More generally, global trade volumes had fallen over the previous year, reflecting both the escalation of trade tensions and slower growth in Chinese domestic demand.
If you are in effect the South China Territories you will have been further worried by the August industrial production number for China only showing an annual growth rate of 4.4%. Whilst the oil price rise ( Brent Crude is around US $69 as I type this) is neutral for Australia it is most definitely negative for China.
If we look at the money supply data then I am afraid there is a cautionary note.
The history of M1 has been revised to include all transaction deposits, whereas previously some of these deposits were only included in M3. The history of M3 and Broad Money has also been revised, reflecting minor conceptual changes. Beyond these historical revisions, movements in transaction and non-transaction deposits between June and July 2019 are larger than usual.
Indeed they are and all I can tell you is that in July broad money ( M3 ) contracted as whoever the clown was at the RBA who made these changes they have made M1 useless as a guide. Unless of course you believe it rose by 11% in a month. They should have run both series for a while . Returning to broad money growth an annual rate of 2.5% is not much as we recall it covers both future inflation and growth.
So in spite of higher oil prices and the likely effect on inflation from it I expect a ying and yang. The Australian authorities will move to support house prices via more interest-rate cuts and credit easing but can that offset a weaker economy which might include an actual contraction? Much might change of course especially as my reliable signal via narrow money has been neutered.