- the team with a difference

Monday, April 26, 2010

RBA: State governments part of housing problem

RBA Board minutes
• Minutes of the last Reserve Bank Board meeting indicate that the central reason why interest rates rose in April was because they were too low – inconsistent with “trend” economic growth and inflation in line with the medium term target.
• The Reserve Bank has made a pointed reference to the “land usage policies of local and state governments” as a contributing factor to the buoyant housing market conditions.
• “The prospective rise in the terms of trade” – more specifically coal, iron ore and gas prices – was a key factor behind the decision to lift rates. That is, export price increases were more significant than had been previously assumed, adding to the urgency to get rates back to normal.
• The RBA Board minutes reveal that “normal” interest rates are defined as lending rates for housing and business since 1997. Home loan rates are near “normal”, but big business rates remain below normal.

What does it all mean?
• Each time the Reserve Bank Board minutes are published, the picture becomes a little clearer. It is certainly apparent that the sharp rise in commodity prices was the key element causing the Reserve Bank to lift rates in April. In essence, the Reserve Bank hadn’t assumed such a sharp rise in mining and energy prices, and therefore was under-estimating the extent of the prospective income boost to the economy. As a consequence, Board members believed that interest rates needed to get back to normal, sooner rather than later.
• The Reserve Bank has been in a rush to get rates back to normal, and with good reason. The last thing the Bank wants is a re-run of the 2007/2008 period where it under-estimated the resources boom, causing inflation to spike higher.
• The Reserve Bank has pinned part of the blame for soaring house prices on state and local governments. However if anything it is still too polite. Many state governments have lacked the urgency and desire to address the fundamental tightness of housing markets. More land needs to be produced, developers and investors need more incentives and fewer barriers and zoning regulations need to be fundamentally re-thought. Many state and local governments are adopting a ‘business as usual’ posture despite the fact that population growth is at multi-decade highs.
• The Reserve Bank isn’t giving hints on future rate moves. The Bank wants rates back to normal, and it isn’t far away from the objective. CommSec believes that the RBA can afford to wait a month or so before lifting rates again.

What do the figures show?
Minutes from the April 2010 Reserve Bank Board meeting
Key Comments:
“In the view of the Board, with forecasts suggesting that growth in the domestic economy in 2010 would be around trend and that inflation would be around 2½ per cent, consistent with the medium-term target, the level of interest rates in the economy would be expected to be close to average. This remained the underlying rationale for consideration of any adjustment to the cash rate in the current period. Since lending rates were still a little below average, members expected that they would probably need to rise further in the period ahead.
• Buoyant housing market: “Members discussed the factors contributing to the recent strong price growth. On the demand side, population growth was strong, households had confidence about future income growth, and mortgage rates were at below-average levels. At the same time, the supply of new housing was not expanding sufficiently, partly because of the land usage policies of local and state governments and also because of the tightness of finance for developers.”
• Terms of trade: “Recent data for the world economy suggested that the recovery in the major advanced economies was still tentative, but that the expansion in most of Australia’s major trading partners in Asia was proceeding strongly. This was feeding through into significant increases in the prices of resource commodities, including increases in the contract prices for coal and iron ore, which were larger than had been expected a few months ago.”
• “Normal” rates: “The increase in the cash rate in early March had been passed through in full to most variable lending rates. Members noted that lending rates for housing and business were a little below their averages for the period since 1997.”
• Consumers are confident, but not spending: “Household surveys suggested that consumer sentiment had remained at a high level in recent months, though consumers appeared quite cautious in their spending; there had been little growth in retail spending over recent months.”
• Weak commercial building: “The non-residential building sector remained subdued and, abstracting from the surge in construction of educational facilities, new approvals were at relatively low levels.”
• Terms of trade surprise/challenges: “Developments in commodity markets meant that the increase in the terms of trade through 2010 was likely to be substantially larger than forecast in the February Statement on Monetary Policy. This implied strong growth in nominal incomes in the Australian economy over 2010. The increases in coal and iron ore prices, along with the developments in the LNG sector, were also contributing to a strong outlook for investment in the resources sector. Members noted that, while the Australian economy was benefiting significantly from developments in the resources sector, these would also pose challenges.

What is the importance of the economic data?
• The Reserve Bank releases minutes of its monthly Board meeting a fortnight after the event. The minutes give a guide to Reserve Bank thinking on interest rate settings.

What are the implications for interest rates and investors?
• There is a simple reason why the ACT is at the top of the state/territory economic rankings – it has handled the demands of a growing population and strong demand for housing. Other states and territories have addressed the problem differently, but less successfully. For more homes to be built, governments need to get back to the planning drawing board.
• Interest rates are destined to rise in coming months, but rate hikes should be less frequent given that the RBA is broadly back where it wants to be.

Source Craig James, Chief Economist, CommSec

Monday, April 5, 2010

Reserve Bank tipped to raise interest rates today

Home borrowers are expected to be hit with some bad news when the Reserve Bank of Australia (RBA) meets today.

Most economists predict the central bank will vote to raise rates by a quarter of a percentage point at its board meeting in Sydney.

A jump in the cash rate - from four per cent to 4.25 per cent - would see monthly repayments on an average $300,000 home loan rise by $50.

The news for borrowers is expected to get worse, with most experts expecting rates to climb to at least five per cent by Christmas.

This would add $200 a month to average home loan repayments.

Borrowers already copped a rate rise in March, which followed three at the end of last year.

The RBA meets on Tuesday morning and is scheduled to announce its decision at 2.30pm (AEST).

Macquarie Group interest rate strategist Rory Robertson said a strengthening jobs market and Chinese demand for Australian resources added to the case for a rate rise.

"Another hike this month still looks like an 80 per cent probability," he said.

National Australia Bank Ltd has no plans to raise its standard variable interest rate higher than any move the central bank makes to the official cash rate this month.

The Reserve Bank of Australia (RBA) is expected to meet on Tuesday to discuss whether or not to lift official interest rates beyond the current 4.0 per cent.

NAB has reassured customers it won't move rates higher than the RBA and says its strategy of matching the central bank has led to a surge in its mortgage volumes.

Personal banking group executive Lisa Gray says the bank has seen an increase in customers in recent months.

"This has been across a range of products, but particularly personal transaction accounts and home loans," Ms Gray said in a statement on Monday.

Meanwhile, some of Australia's biggest property developers have urged central bank policy makers to reconsider an interest rate rise.

"Each interest rate rise is tantamount to a game of Russian roulette with Australia's housing supply," Urban Taskforce Australia chief executive Aaron Gadiel said in a statement.

He argued that with Australia undersupplied by 200,000 homes, interest rates should not be used to attack housing demand when the problem was actually the undersupply of housing.

"The Reserve Bank has been using increased interest rates as a weapon against home price inflation," Mr Gadiel said.

"Interest rate rises reduce demand for housing, but the origins of this problem lie on the supply side."

Mr Gadiel said developers were also still struggling to secure bank financing for projects.

"Weaker housing demand courtesy of interest rate increases makes it more difficult to demonstrate project viability to a bank.

"Any increase in interest rates undermines demand for housing and boosts the holding costs faced by developers."