Cooling in the national housing market: Gareth Aird
GUEST OBSERVER
The Minutes of the September Board meeting suggest that the RBA is feeling increasingly comfortable with the domestic economic backdrop.
There is a slight hawkish tilt creeping into RBA commentary of late, although we would characterise the RBA as still maintaining a neutral policy bias.
The marked improvement in the labour market means that baring an economic shock, the next move in the cash rate is up. Market pricing has shifted further towards tightening over the past week. A rate rise is fully priced by August 2018.
The Board continues to apply a positive tone to developments offshore. In particular, it was noted that, “the data received over the prior month confirmed that global economic conditions had strengthened since 2016.” While labour markets continue to tighten, the Board flagged that, “core inflation had eased a little.”
As Governor Lowe flagged a few weeks ago, this month’s “special discussion” was on the Chinese economy. In that context, nothing should be read into the Board’s decision specifically to devote two paragraphs to the Chinese economy. The Board notes that although iron ore prices had risen, in part because of Chinese demand, it expects prices to fall over the period ahead because of a lift in the supply of iron ore. We agree.
The Board continues to sound upbeat on the Australian labour market, noting that the broad-based employment growth across the states signalled the end of the mining boom was nearing completion. And more importantly, “solid growth in employment was expected to continue, which would support household incomes and thus spending.”
Here we note that the Minutes predate the very strong August labour force report (published last week) that indicated employment rose by 54k over the month. It was the sixth robust set of monthly jobs numbers in a row and the detail was impressive (see here). As a result, the Board will be increasingly confident with its forecasts for GDP growth to lift to 23⁄4% in 2017/18.
On the latest quarterly capex survey, the Board notes that “investment expectations pointed to this (a pick-up in non-mining investment) occurring”.
On housing, the Board suggests that, “there had been clearer signs of an easing in conditions in the Sydney market but less so in Melbourne”. That looks to be a fair assessment to us. We expect some continued cooling in the national housing market given there has been an easing in credit growth to investors, auction clearance rates have come down and consumer sentiment towards housing has waned.
Underemployment rate
On the AUD, the Board notes that the appreciation of the exchange rate in recent months was weighing on domestic growth and inflation. In our view, we are likely to see weak reads on tradables inflation over the next few quarters which will weigh on the overall CPI basket.
The Outlook
We retain our long held view that policy tightening won’t arrive until late 2018. But we also acknowledge that the risk has shifted to a rate hike before then because of the remarkable improvement in the labour market. Employment growth has been phenomenal and there has been a gradual tightening in the labour market.
From a monetary policy perspective, it is about what this improvement means for wages and inflation. And how the RBA responds. In our view, while wages growth should step up in Q3, we don’t expect the underlying pulse to materially lift given spare capacity in the labour market remains elevated. In addition, there are still risks around the consumer given a declining savings rate has been required to generate modest consumption growth. Finally, the AUD looks stuck at around 80 US cents – any further appreciation because of movements in interest rate differentials is undesirable.
With the housing market cooling, as evidenced by a range of indicators, and residential construction to become a drag on growth from here, the risks around a hike in line with market pricing appear asymmetric. There is a lot to like about the recent data flow, but there is a still a fragility to economic momentum that will not dissipate until non-mining business investment takes off. As such, policy on hold until late 2018 continues to seem the most probable scenario.
The near term focus from a monetary policy perspective turns to Friday when the RBA Governor Lowe delivers a speech titled, “The Next Chapter”. The heading implies a forward looking perspective from Dr Lowe which means it’s likely to be particularly relevant to market participants.
Gareth Aird is economist at Commonwealth Bank and can be contacted here.