Not enough homes, rates firmly on hold: Craig James
GUEST OBSERVER
Higher home prices: The Bureau of Statistics reports that Australian home prices rose by 2.2 per cent in the March quarter to stand 10.2 per cent higher over the year.
More homes: At the end of March there were 39,800 more homes than at the end of December. But the number of NSW homes rose by just 7,600 – the smallest quarterly gain in three years.
Reserve Bank Board minutes: The minutes from the June 6 Board meeting shows the Reserve Bank weighing up a raft of factors including the Federal Budget, signs of improvement in retail spending and reports of localised labour shortages feeding into higher wages.
Consumer confidence eases: The weekly ANZ/Roy Morgan consumer confidence rating eased from an 8- week high of 112.9 to 112.4 in the week to June 18.
The Reserve Bank Board minutes provides guidance on interest rate settings. Consumer confidence data is important for retailers. The residential property price data is important for housing-dependent businesses.
What does it all mean?
It is taking some time for homes to be built to meet the demands of the population. That is particularly the case in NSW where the number of homes lifted by just 7,600 in the March quarter – the smallest gain in three years. Based on recent trends, the NSW population may have lifted by around 30,000 people in the March quarter. As the Reserve Bank has observed, the preference for apartment building is creating delays for home supply to bridge the gap with demand.
The wealth held in Aussie homes has passed $6,600 billion, up almost 11 per cent over the past year. While many bemoan poor housing affordability, wealth levels continue to soar for the two-thirds of Aussies that own homes or are paying them off.
The Reserve Bank Board has given no hints that rates will change any time soon. Board members considered all manner of factors at the June meeting although it is clear that the housing are job markets are being watched carefully. Since the meeting, data shows stronger job markets but softer home prices, further entrenching the Reserve Bank on the interest rate sidelines.
Consumer confidence remains just OK. Aussie consumers still believe that it is a good time to buy a major household item like a fridge or TV, but they are fretting over bills like council and utility rates and insurance premiums. And then there is the on-going adjustment to the new reality that annual wage growth will be closer to 2 per cent rather than 3- 4 per cent as in the past.
What do the figures show?
Reserve Bank Board minutes:
Last paragraph: “The Board continued to judge that developments in the labour and housing markets warranted careful monitoring. Taking into account all the available information, including that year-ended growth in output was expected to have slowed in the March quarter, the Board judged that holding the accommodative stance of monetary policy unchanged at this meeting would be consistent with sustainable growth in the economy and achieving the inflation target over time.”
“ wage growth and inflation were expected to increase gradually as the economy strengthened.”
“ economic growth was still expected to increase gradually over the next couple of years to a little above 3 per cent per annum.”
“Over recent times, with interest rates at low levels, the Board has set monetary policy to support the economy in its transition following the mining investment boom, while also paying close attention to trends in household borrowing and related financial stability considerations. Members discussed the effect of monetary policy decisions on financial stability and on future inflation, employment and output. They also discussed the role that prudential supervision can play in promoting financial stability. In view of this, members acknowledged the importance of a strong relationship between the Bank and other regulators, particularly APRA.”
“According to liaison and survey data, retail trading conditions had remained challenging, although they had appeared to have improved a little since the start of the year, and this assessment had been supported by the large rise in retail sales in April.”
“Liaison suggested that, while wage growth is likely to remain subdued for some time yet, there had been isolated reports of localised and skills-specific labour shortages feeding into higher wages.”
“The Australian Government Budget had reported little change to the expected cash deficits over the next few years and, as a result, had had little effect on the Bank's near-term outlook for the Australian economy. Some new large infrastructure projects had been announced as a part of the Budget, but most of that spending would occur after 2019.”
Residential property prices
The Bureau of Statistics (ABS) has released its Residential Property Price indexes.
“The price index for residential properties for the weighted average of the eight capital cities rose 2.2 per cent in the March quarter 2017. The index rose 10.2 per cent through the year to the March quarter 2017.
The capital city residential property price indexes rose in Sydney (+3.0 per cent), Melbourne (+3.1 per cent), Adelaide (+1.5 per cent), Canberra (+2.8 per cent) and Hobart (+3.4 per cent) and fell in Perth (-1.0 per cent) and Darwin (-0.9 per cent). Brisbane was flat (0.0 per cent).
Annually, residential property prices rose in Sydney (+14.4 per cent), Melbourne (+13.4 per cent), Hobart (+11.3 per cent), Canberra (+8.9 per cent), Adelaide (+5.0 per cent) and Brisbane (+3.5 per cent) and fell in Darwin (-5.9 per cent) and Perth (-3.5 per cent).
The ABS notes that as at March 2017 there were 9.858 million homes in Australia. In the March quarter the number of homes rose by 39,800 with an extra 11,200 homes in Victoria, 9,600 homes in Queensland and 7,600 homes in NSW.
“The total value of residential dwellings in Australia was $6,602,132.3 million at the end of the March quarter 2017, rising $163,122.9m over the quarter.
The mean price of residential dwellings rose $13,900 to $669,700 and the number of residential dwellings rose by 39,800 to 9,858,400 in the March quarter 2017
Consumer sentiment
The weekly ANZ/Roy Morgan consumer confidence rating eased from 112.9 to 112.4 in the week to June 18.
But confidence is down 3.3 per cent over the year and below the average of 113.2 since 2014.
Three of the five components of the index rose in the latest week:
- The estimate of family finances compared with a year ago was down from +9 to zero;
- The estimate of family finances over the next year was unchanged at +23;
- Economic conditions over the next 12 months was up from -7 to -6;
- Economic conditions over the next 5 years was up from +1 to +4;
- The measure of whether it was a good time to buy a major household item was up from +38 to +41:
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.
The Australian Bureau of Statistics (ABS) provides quarterly data on residential prices. The figures provide further perspectives on the state of the housing purchase sector.
The ANZ/Roy Morgan weekly survey of consumer confidence closely tracks the monthly Westpac/Melbourne Institute consumer sentiment index but the former measure is a timelier assessment of consumer attitudes and is now closely tracked by the Reserve Bank.
What are the implications for interest rates and investors?
CommSec expects the Reserve Bank to remain on the interest rate sidelines for an extended period.
It takes time to build apartments – especially in light of the more common high-rise developments that dot the Sydney landscape. The homes are coming but the gap between demand and supply is closing only slowly. The longer it takes for the homes to be built, the greater the upward pressure on prices. The risk is that housing supply will come on with a rush, leading to a messy correction of home prices.
According to the Bureau of Statistics, sales of combined houses and apartments in Sydney in the March quarter were the lowest in 14 years. That is remarkable in a city where population is growing faster than the average rate over the past decade.
The Reserve Bank Board has highlighted the importance of the ‘third wheel’ – that is, regulatory policy to complement monetary and fiscal policy. But no arm of policy is precise in its impact on the economy so regulators must stand ready to change policy when required.
Craig James is the chief economist at CommSec.