October 10th, 2013
by Ari Charney, Investing Daily
Although the Reserve Bank of Australia (RBA) appears to have maintained its easing bias, it may now be in watch-and-wait mode as it monitors how its monetary policy affects the country’s housing market. The central bank has been in an easing cycle since late 2011, and with the most recent 25 basis point cut in August, the cash rate now stands at an all-time low of 2.5 percent.
Following a meeting of the RBA’s board on Oct. 1, Governor Glenn Stevens issued a statement that said the board had decided to leave the cash rate unchanged. However, the central bank chief also noted that it’s still taking time for the economy to show evidence of the full effect of monetary easing, and that the pace of borrowing has remained largely subdued. Stevens also said that even with the decline in the Australian dollar, a further drop will be necessary to boost the economy.
These latter statements suggest that the RBA has maintained its easing bias, and that further rate cuts are forthcoming. However, some analysts and economists are becoming increasingly concerned about the formation of a property bubble. Unlike many of its developed-world peers, Australia’s housing market suffered comparatively minor declines in recent years.
Historically low rates have started to spur greater activity in the real estate sector, including among investors, and prices are on the rise again. In its statement, the RBA was largely silent on the matter, though it may have alluded to the situation by observing that demand for financing had increased among households.
While home prices hit all-time highs in Sydney, Melbourne and Brisbane during September, the average change among the country’s five major cities was just 5.7 percent year over year. The Australian Bureau of Statistics also reported that approvals for private-sector home construction rose for the ninth consecutive month in August. On a seasonally adjusted basis, approvals for new homes were up 10.3 percent year over year.
Overall, these data suggest gathering momentum, rather than irrational exuberance. As such, much of the hand-wringing over the prospect of a bubble appears to be anticipatory, rather than based on current prices. Of course, the housing sector is one area that could help lead Australia’s economy until commodities rebound. And Australia can avoid a housing bubble as long as regulators are monitoring the situation carefully.
As far as the latter goes, Richard Coppleson, a seasoned broker at Goldman Sachs, believes the RBA is very much focused on the housing market. In his daily note, he said the fact that the central bank’s statement on monetary policy did not directly mention rising home prices means that this must be the proverbial elephant in the room, and that it highlights “how concerned they must secretly be.”
Although we don’t believe Australia’s housing market has reached truly frothy levels, one area of legitimate concern is the fact that the unemployment rate is rising at the same time. As the commodities boom peaks, unemployment has been on the rise and now stands at 5.8 percent, which is just a tenth of a percentage point below the level it reached during the Global Financial Crisis. While that trend is worrisome, those numbers would likely make policymakers in the US and other countries in the developed world salivate.
Previously, the conventional wisdom had been that the RBA would make at least one more rate by the end of the year. But now traders and economists believe that the central bank could pause until early next year, which would give the RBA time to calibrate its policymaking should the rebound in the housing sector start to approach unsustainable levels.
According to interest-rate swaps data compiled by Bloomberg, traders believe there’s a 69 percent chance that the cash rate will remain at 2.5 percent through the end of the year. And Westpac Chief Economist Bill Evans has adjusted his rate-cut forecast, with the next round of 25 basis point rate cuts projected to occur in February and May. Other economists have similarly followed suit.
Despite this sudden caution, the RBA has other regulatory levers, beyond tightening monetary policy, to rein in real estate speculation. With the Australian dollar still at relatively high levels, the central bank will need to remain on an easing cycle to force the exchange rate lower. That will help make the export-oriented commodities sector more competitive globally, which should ultimately flow through to our stocks.