The Australian Financial Review – 5 March, 2015
by Jacob Greber With Nassim Khadem
The official crackdown on Sydney property lending and new curbs on illegal foreign housing investment have boosted the Reserve Bank of Australia’s scope for future interest rate cuts.
Reserve Bank board member, John Edwards said that the economy is too weak to lower the jobless rate, which some forecasters now predict could edge close to 7 per cent over the next 12 months, after the economy grew just 0.5 per cent in the December quarter, or about two-thirds of its long-run pace.
Real net national disposable income per capita, a measure of what Australia earns from its exports and production, didn’t change in the quarter after falling 0.7 per cent in the September quarter.
Dr Edwards said that excessive property price gains were largely limited to Sydney, suggesting the central bank isn’t too worried that lowering interest rates further will create a national housing bubble and is focused on weak growth and rising unemployment.
“But it does seem to be, in recent months, more of a Sydney problem than a national problem, which is an important piece of information for the RBA.”
David Murray, former Commonwealth Bank chief executive and head of the Abbott government’s financial systems inquiry, said property price gains were not only making housing unaffordable but were putting the entire financial system at risk.
“It is a serious issue and if interest rates continue to fall, there will have to be prudential offsets to limit the risks in the housing market,” Mr Murray said, adding that there were a number of ways of doing just that, such as through limiting loan-to-value ratios on second properties.
“The lower these rates get, the more governments will have to consider these responses.”
Tuesday’s surprise decision by the Reserve Bank to hold the cash rate steady at a record-low 2.25 per cent was partly blamed by Governor Glenn Stevens on excessive price gains in Australia’s biggest city.
Most economist expect Mr Stevens to deliver a follow up to February’s rate cut. Dr Edwards cited recent property data that suggests house prices have started to cool, and highlighted a coming crack-down on investor lending by the Australian Prudential Regulation Authority.
Dr Edwards said there had not yet been any impact from the government’s insistence that foreign investors in real-estate “actually following the rules.”
Treasurer Joe Hockey announced a series of measures last week to block illegal offshore property buying, including new fees for foreign buyers. On Tuesday he ordered China’s 15th richest man to sell his $39 million Point Piper mansion or face prosecution.
The country’s biggest mortgage broker reported a 16 per cent surge in the value of the home loans it processed last month, confirming the surprise cut in interest rates has further fired up the $1.3 trillion mortgage market.
Figures published on Wednesday by wholesale mortgage broker AFG showed lending growth accelerated after February’s rate cut. AFG processed $4.3 billion in home loan sales last month, up 16 per cent from a year earlier.
If they succeed in cooling Sydney house prices crackdowns by APRA and foreign investment watchdogs could free the Reserve Bank’s hand to spur the economy with additional monetary policy stimulus – something the latest national accounts indicate may be needed sooner rather than later.
With businesses running down inventories and delaying fresh investment, gross domestic product rose by an annual 2.5 per cent in the three months through December, the Australian Bureau of Statistics said on Wednesday.
However, that figure was flattered by the particularly strong quarter of growth recorded in the three months through March 2014, when GDP jumped 1.1 per cent on a surge in export-volumes.
Since then, over the final nine months of 2014, quarterly growth has hovered between 0.4 and 0.5 per cent, implying an annualised pace of GDP growth of less than 1.9 per cent. Historically, growth of just above 3 per cent has been needed to produce enough employment to drive down the jobless rate.
If the trend continues this year, as early evidence already suggests to be the case, the Reserve Bank will face renewed pressure for extra cuts to spur investment and hiring.
“It’s not strong enough,” Mr Edwards said of the latest growth figures. “Two point five per cent GDP growth is not enough if you’ve got workforce growth of around 1.5 per cent and productivity growth, on the broadest measure, is quite strong. That’s what counts for employment growth.
“I would like to see firmer growth, but I do think monetary policy has made a contribution where it can,” he added.
Sub-trend growth means the jobless rate is almost certain to continue climbing by at least 0.1 of a percentage point in coming quarters. In January, the rate hit a 12-month high of 6.4 per cent.
While the ABS figures showed non-dwelling construction subtracted 0.1 percentage points from the quarterly growth rate, and inventories detracted 0.6 percentage points, household spending was a surprise bright spot, adding 0.5 of a percentage point to the quarterly rate of growth. Exports contributed 0.2 of a percentage point.
Mr Edwards noted the drag on growth from inventories and speculated that some of that may reverse into a net positive for growth as companies restock in coming quarters.
“What’s happening on housing, consumption, exports, and in this case imports, it’s not really an outcome that makes me pessimistic.
“In terms of what we’d expected from monetary policy, it’s working reasonably well. We’ve had a substantial currency depreciation that’s been helpful to export volumes and returns, and we’ve had a big upswing in residential construction, which, again, you could relate to lower interest rates.
“And now, we have seen a little more firmness in household consumption, which might have a little bit of influence from asset prices and lower interest rates, and their impact on mortgage repayments.”
Australia’s terms of trade dropped 1.7 per cent in the quarter and were down 10.8 per cent over the past 12 months, further eroding government revenue.