Australia gets ready for QE but claims to reject negative interest-rates

So far the credit crunch era has been relatively kind to Australia. A major factor in this has simply been one of location as its huge natural resources have been a boon and that has been added to by its proximity to a large source of demand. Or putting it another way that is why we have at times given it the label of the South China Territories. However times are now rather different with the headlines being occupied by the subject of the various trade wars and as we have noted along the way this is particularly impacting on the Pacific region. Thus we find that the Governor of the Reserve Bank of Australia has given a speech this morning on unconventional monetary policy as they too fear that the super massive black hole that was the impact of the credit crunch may be pulling them towards an event horizon.

Why?

If we look at the state of play as claimed by Philip Lowe you may be wondering why this speech is necessary at all?

The central scenario for the Australian economy remains for economic growth to pick up from here, to reach around 3 per cent in 2021. This pick-up in growth should see a reduction in the unemployment rate and a lift in inflation. So we are expecting things to be moving in the right direction, although only gradually.

This is straight out of the central banking playbook where you discuss such moves and then imply they will not be necessary. They think it is a way of deflecting blame and speaking of deflecting blame interest-rate cuts are nothing to do with them either.

low interest rates are not a temporary phenomenon. Rather, they are likely to be with us for some time and are the result of some powerful global factors that are affecting interest rates everywhere

If interest-rates are indeed set by “powerful global factors” then we could trim central banks down to a small staff surely?

Banks

As ever it turns out to be all about “The Precious! The Precious!” for any central banker.

At the moment, though, Australia’s financial markets are operating normally and our financial institutions are able to access funding on reasonable terms. In any given currency, the Australian banks can raise funds at the same price as other similarly rated financial institutions around the world, and markets are not stressed.

You might think that plunging into unconventional economic policy might be driven by the real economy but oh no as you can see there is a different driver. In spite of the effort below to say Australia is different this means that it has learnt nothing and will make the same mistakes.

We are not in the same situation that has been faced in Europe and Japan. Our growth prospects are stronger, our banking system is in much better shape, our demographic profile is better and we have not had a period of deflation. So we are in a much stronger position.

Again this is a central banking standard as they claim “this time is different” and then apply exactly the same policies!

QE it is then

We get various denials which I will come to in a bit but the crux of the matter is below.

My fourth point is that if – and it is important to emphasise the word if – the Reserve Bank were to undertake a program of quantitative easing, we would purchase government bonds, and we would do so in the secondary market.

The explanation of why he would choose this option will certainly be popular with Australia’s politician’s.

The first is the direct price impact of buying government bonds, which lowers their yields. And the second is through market expectations or a signalling effect, with the bond purchases reinforcing the credibility of the Reserve Bank’s commitment to keep the cash rate low for an extended period.

You may note that he has contradicted himself with the second point as he has already told us that low interest-rates are “are likely to be with us for some time”.  He then points out again that he has already acted this year.

It is important to remember that the economy is benefiting from the already low level of interest rates, recent tax cuts, ongoing spending on infrastructure, the upswing in housing prices in some markets and a brighter outlook for the resources sector.

That also gets awkward because having cut interest-rates by 0.75% already this calendar year Governor Lowe is implying we could get to his QE threshold quite quickly.

Our current thinking is that QE becomes an option to be considered at a cash rate of 0.25 per cent, but not before that. At a cash rate of 0.25 per cent, the interest rate paid on surplus balances at the Reserve Bank would already be at zero given the corridor system we operate. So from that perspective, we would, at that point, be dealing with zero interest rates.

Why QE?

Well he is clearly no fan of negative interest-rates.

More broadly, though, having examined the international evidence, it is not clear that the experience with negative interest rates has been a success.

Indeed he may even have read yesterday’s post on here.

Negative interest rates also create problems for pension funds that need to fund long-term liabilities.

Or perhaps he has been a longer-term follower.

In addition, there is evidence that they can encourage households to save more and spend less, especially when people are concerned about the possibility of lower income in retirement. A move to negative interest rates can also damage confidence in the general economic outlook and make people more cautious.

Although this bit is quite a hostage to fortune and may come back to haunt Governor Lowe.

The second observation is that negative interest rates in Australia are extraordinarily unlikely.

Comment

It is hard not to have a wry smile as central bankers catch up with a point I was making about a decade ago.

Given these considerations, it is not surprising that some analysts now talk about the ‘reversal interest rate’ – that is, the interest rate at which lower rates become contractionary, rather than expansionary

I argued it was in the region of 1.5% and Australia is now well below it so it is I think singing along with Coldplay.

Oh no I see
A spider web and it’s me in the middle
So I twist and turn
Here am I in my little bubble

As to why the RBA is preparing the ground for even more monetary action then let me switch to Deputy Governor Debelle who also spoke today. This starts well.

Over much of the past three years, employment has grown at a healthy annual pace of 2½ per cent. This has been faster than we had expected, particularly so, given economic growth was slower than we had expected.

But in a reversal of the Meatloaf dictum that “two out of three aint bad” we get this.

But the unemployment rate has turned out to be very close to what we had expected and has moved sideways around 5¼ per cent for some time now………Then I will look at wages growth and show that the lower average wage outcomes of the past few years have reflected the increased prevalence of wages growth in the 2s across the economy.

The next issue is that does the mere mention of QE operate in the same manner as The Candyman in the film? If so that is at least 2 mentions in Australia so at the most we have 3 to go before it appears.

Finally with a ten-year bond yield already at 1.06% or about 1.5% lower than a year ago, what extra is there to be gained?

 

 

 

 

What is happening to house prices in Australia?

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.

Green shoots?

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,

Comment

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.

 

 

 

 

 

 

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.

 

Australia faces its own house price bubble demons

Today a several themes of this website have found themselves entwined. More evidence has emerged of yet another house price bubble and it has happened in one of the teams playing at the Rugby World Cup. So it is time for one of my occasional visits to here.

I come from a land down under
Where beer does flow and men chunder
Can’t you hear, can’t you hear the thunder
You better run, you better take cover.

What the Men At Work need to take cover from is what is looking like a bubbilicious property market especially in another familiar feature of these times in its capital city of Sydney, or as I have just made a mistake its perceived capital city. There the market looks red-hot almost as if we are singing along with Midnight Oil.

How do we sleep while our beds are burning?

No doubt others are mulling this lyric from the same song.

The time has come
To say fair’s fair
To pay the rent
To pay our share

The Numbers

The Australian Bureau of Statistics has released its property price indices this morning so let’s get straight to it.

The price index for residential properties for the weighted average of the eight capital cities rose 4.7% in the June quarter 2015.

They mean state capitals here and that looks a fair pace and I think even faster than that of Sweden. If we look into the detail we see that there are both pronounced hotspots and cold spots.

The capital city residential property price indexes rose in Sydney (+8.9%), Melbourne (+4.2%), Brisbane (+0.9%), Adelaide (+0.5%) and Canberra (+0.8%), was flat in Hobart (0.0%) and fell in Perth (-0.9%) and Darwin (-0.8%).

So we get the idea that Sydney is surging and Perth in particular falling. As Perth is the capital city of Western Australia where so much of the resources and commodity producing industry is located if there is a surprise here it is that it has not fallen faster. After all 2015 has been a hard year for that industry.

For some more perspective let us move to an annual comparison.

The index rose 9.8% through the year to the June quarter 2015.

So again all rather Swedish and the breakdown is shown below.

Annually, residential property prices rose in Sydney (+18.9%), Melbourne (+7.8%), Brisbane (+2.9%), Canberra (+2.8%), Adelaide (+2.7%) and Hobart (+1.5%) and fell in Darwin (-1.8%) and Perth (-1.2%).

If you want to know what this means in terms of actual prices then the numbers are below.

The mean price of residential dwellings rose $26,200 to $604,700 and the number of residential dwellings rose by 38,400 to 9,528,300 in the June quarter 2015.

The next part has a dubious element as you are using marginal prices for some of the stock to value the whole stock but here it is.

The total value of residential dwellings in Australia was $5,761,607.2m at the end of June quarter 2015, rising $271,939.1m over the quarter.

What is official policy?

Last week the Reserve Bank of Australia (RBA) released its latest Minutes which told us this.

They also noted that conditions in the housing market overall had remained strong and that housing price inflation nationally had risen since the beginning of the year……In particular, the strength in housing price inflation had been concentrated in Sydney and Melbourne, mainly for detached houses

There was an implicit rather than an explicit acknowledgement of the RBA’s role in this.

Members noted that very low interest rates would continue to support growth in dwelling investment and household consumption.

Also it was keen to start a campaign to shift the blame elsewhere.

The Bank was continuing to work with other regulators to assess and contain risks that may arise from the housing market.

The RBA has been cutting its official interest-rate since late 2011 when it was 4.75% and it has cut twice already in 2015 leaving it at 2%. The ten-year bond yield has fallen from 5.6% in early 2011 to 2.76% now and we know from our observations elsewhere what that will have done to the price of mortgage lending.

Actually the Sydney Morning Herald has helped us out today.

The most competitive rate offered by small lenders Credit Union SA and Community First Credit Union-owned Easy Street had fallen by more than 1 percentage point in the last year, with both offering loans at 3.99 per cent, while online bank ING Direct was also offering rates of 3.99 per cent, Mozo said.

It is wealth gains

The RBA has also engaged in the usual central banking practice of claiming the house price gains as a wealth increase or effect. If we move on again from the dubious system of using a marginal price for an average value we see that it has published a paper telling us this.

The preferred estimate suggests that a 1  per cent increase in housing wealth is associated with a one-half per cent increase in new vehicle registrations.

So these clever central bankers have pumped up house prices and the economy gains. How clever! To be fair it thinks that the effect is less than half that for other areas but again we are left with the impression that house price gains add to wealth and there appears to be no mention of inflation.

Oh I hope that they did not buy Volkswagens with their new found “wealth”. Or even worse Volkswagen shares.

Some Deeper Perspective

Another RBA paper has looked at longer-term trends.

In real terms, housing price inflation during the 1980s was relatively low, at 1.4 per cent per annum compared with 4.5 per cent during the period from 1990 to the mid 2000s, and 2.5 per cent over the past decade.

So the present gains are on top of past ones.

Who is driving this?

I asked the question on Twitter and received the following replies.

@econhedge it’s all China. they are snapping up 20-23% of new supply in NSW and Victoria

@fundamentalmac Yes the Chinese

The Daily Reckoning put an interesting perspective on it.

Not only is Sydney priced OK for China’s rich, it has a thing that’s pretty rare in the big cities of China these days: blue sky.

From a Chinese perspective house prices in Sydney may not have changed much as you see some 5.45 Yuan were needed a year ago to buy an Aussie Dollar whereas now we can rearrange those two numbers to 4.54. Those who read my update covering the Auckland property market in New Zealand on the 10 th of this month may be experiencing some deja vu here.

Comment

There is much to consider in the combination of a cooling economy and a housing market exhibiting bubbles. It can lead to media confusion with the Sydney Morning Herald telling us these two things today.

Sydney property prices faltering…………Prices in Sydney grew at 8.9 per cent in the quarter, to give 18.9 per cent over the year.

Up truly is the new down or something like that. Time for some Kylie.

I’m spinning around
Move out of my way

We are in fact seeing three factors combine. Firstly the boom and more recently bust in the Australian commodity and resource sector where the boom went national but the bust is so far regional. Secondly the easy monetary policy of the RBA. Thirdly the desire of the Chinese to purchase property in what they consider to be a safe-haven be that a political,economic or environmental one. In a way they are all combined as we see the Aussie Dollar fall.

Meanwhile we are promised that the modern cure-all will fix this as macroprudential policies are applied. That will only convince those with little or no knowledge of economic history. Meanwhile for the Australian economy the house price bubbles in Sydney and Melbourne are summed up for us by INXS.

Makes you wonder how the other half live

The devil inside
The devil inside