RBA Governor questions benefit of lower rates: CommSec's Savanth Sebastian

RBA Governor questions benefit of lower rates: CommSec's Savanth Sebastian
RBA Governor questions benefit of lower rates: CommSec's Savanth Sebastian
GUEST OBSERVER
 
In his final speech as Reserve Bank Governor, Glenn Stevens highlighted the limitations and constraints of a super-low interest rate environment.
 
“I have serious reservations about the extent of reliance on monetary policy around the world. It isn't that the central banks were wrong to do what they could, it is that what they could do was not enough, and never could be enough, fully to restore demand after a period of recession associated with a very substantial debt build-up”.

Home loans: The number of loans (commitments) for budding home owners (owner-occupiers) rose by 1.2 percent in June. Excluding the refinancing of dwellings, the number of loans was up by 2.1 percent.

Consumer confidence: The Westpac/Melbourne Institute survey of consumer sentiment rose by 2 percent in August to 101.0. The confidence index is up 1.6 percent on a year ago. The survey was conducted August 1st-4th.

The housing finance data has implications for banks, building material suppliers and retailers. The consumer confidence figures have implications for finance providers, retailers, and companies dependent on consumer and business spending.
 
RBA Governor questions benefit of lower rates: CommSec's Savanth Sebastian

What does it all mean?

The Reserve Bank Governor has used his last public forum as a seminal speech to discuss a number of wide ranging issues from inflation targeting, the effect super low interest rates, a review of the past decade and also what “normal” growth may be in the current environment. The Governor did ask a lot of questions but as is the case with the Reserve Bank left it up to the public for interpretation.

However the section of the speech that focussed on looking ahead, discussed the constraints of monetary policy. The Governor highlighted that monetary policy on its own is not enough to boost growth significantly. In fact a combination of public and private investment would be needed to support growth over the medium term. Interestingly the Governor did suggest that the current inflation target is still the right methodology to support longer-term growth outcomes.

When it comes to the outlook for rates the Governor suggested that Australia is not in isolation and the negative and super low interest rates on a global front has also pushed the Reserve Bank in that direction.
 
RBA Governor questions benefit of lower rates: CommSec's Savanth Sebastian
 
“We in Australia have done fewer such things, but we are connected to the world, and the effects of policies adopted elsewhere condition the policy choices available to us”.

The latest data on the housing sector could be classified as somewhat old news given that it predates the Reserve Bank interest rate cut last week. What it does do is provide a useful barometer for housing activity earlier this year. And in that context housing activity remains solid. The value of loans to build new homes stood at a just under $3 billion – easing modestly from the record high of $3.45 billion in March. There is a healthy pipeline of work, with owner occupiers likely to dominate home building and buying.
 
Interestingly the proportion of fixed rate loans fell sharply
  • over the past two months to just 13.4 per cent – a six month
  • low. In addition the number of home loan refinancing transactions fell for the past two months, although it remains well above decade averages. It may be the expectation of further rates cuts seems to have resulted in home owners holding off from fixing rates. No doubt with the latest rate cut and intense competition by lenders it is likely that more home owners will re-evaluate their home loans in coming months. The anticipated lift in refinancing will eventually provide additional savings to household budgets – injecting fresh spending power into the economy.
The average loan size recorded a sizable 5.7 per cent in June. In fact the gain was the strongest percentage increase in nine months. The May rate cut may have been catalyst for the lift in home loan size, providing mortgages holders with the opportunity to comfortably service larger loans. It should be noted that the average home loan is also influenced by home prices, composition of borrowers and the geographic location of home purchases.

The monthly consumer confidence data is now merely useful as a check against the timelier weekly survey. The ANZ-Roy Morgan survey has the same number of survey respondents as the monthly series, has been running over the same number of years and covers the same questions but is conducted each week. And what is clear from both surveys is that confidence levels are a little higher than where they were a month ago. The consumer confidence reading on both fronts remains “ok”, with consumers modestly optimistic about life. 

What do the figures show?

Housing finance - number

The number of loans (commitments) for budding home owners (owner-occupiers) rose by 1.2 per cent in June after falling by 0.8 per cent in June. Excluding the refinancing of dwellings, the number of loans was up by 2.1 per cent.

The number of new home loans was up by 6.7 per cent on a year ago.
Loans by owner-occupiers for the construction of homes rose by 2.1 per cent in June.
Loans to buy newly-erected dwellings rose by 2.7 per cent.
Loans for the purchase of established dwellings (excluding refinancing) rose by 1 per cent.
The number of refinancing transactions fell by 0.4 per cent. 

Housing finance - value

  •  The value of new housing commitments (owner occupier and investment) rose by 2.3 per cent in June after rising by 1.8 per cent in May.
  • Owner-occupier loans rose by 1.8 per cent while investment loans rose by 3.2 per cent.
  •  The value of loans by owner-occupiers and investors to build new homes fell by 1.3 per cent in June after rising by 3.5 per cent in May.
  • The value of loans to build new homes eased further from the record highs of $3.45 billion in March to $2.99 billion in June.
Housing finance – other statistics

The proportion of first-time buyers in the home loan market rose from a 12-year low of 14.2 percent in May to 14.3 percent in June. (However the figures take into account refinancing loans and as such the figures may misrepresent the true situation).

The proportion of fixed rate loans fell from 14.7 percent to 13.4 percent in June. And the average home loan across Australia stood at $360,100 in June, up 3.5 percent on a year ago.

Westpac/Melbourne Institute consumer sentiment:

The Westpac/Melbourne Institute index of consumer confidence rose by 2 percent in August to 101.0. The confidence index is up 1.6 percent on a year ago.

The current conditions index rose by 1.3 percent while the expectations index rose by 2.4 percent.

Four of the five components of the index rose in August:

The estimate of family finances compared with a year ago was up by 1 per cent;  The estimate of family finances over the next year was up by 4.3 per cent;

  •  Economic conditions over the next 12 months was up by 3.5 per cent;
  •  Economic conditions over the next 5 years was down by 0.7 per cent;
  •  The measure on whether it was a good time to buy a major household item was up by 1.6 per cent.
Gender & demographics: Men (index reading of 104.1, up 1.5 per ent) were still more optimistic than Women 98.1, up 2.4 percent). The sentiment index for young people rose by 3.9 percent to 112.9 in August. Across the other demographics: 25-44 years (index 103.0, up by 1.1 percent); 45 years plus (index 96.9, up 2.1 per cent).

  Housing outlook: A good time to buy a dwelling? – Index up 10.1 per cent in the month and up 9.2 per cent on the year.

  Housing Finance data is produced monthly by the Bureau of Statistics and shows commitments by lenders, such as banks, to provide finance for housing purposes. The lending figures relate to those looking to buy or build homes to live in as well as those seeking to buy or build homes for investment purposes. Generally people get their finance organised first, so the figures are regarded as a leading indicator on the housing market.

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RBA Governor questions benefit of lower rates: CommSec's Savanth Sebastian

  Westpac and the Melbourne Institute release the Index of Consumer Sentiment each month. According to Melbourne Institute: “The survey of consumer sentiment was first undertaken in 1973 and was conducted on a quarterly basis until 1976, a six-weekly basis from 1976 to 1986, and has been conducted monthly ever since.” Confident consumers may be more inclined to spend, especially on major items.

What are the implications for interest rates and investors?

  The housing sector will continue to be a key driver of growth, given the amount of home building on the horizon. Home prices are lifting, but investors need to be more cautious about the outlook. Arguably we are near the point of maximum velocity. The plethora of cranes dotting skylines across the country indicate that plenty of sparkling new apartments will be coming onto the market over the next few years
 
CommSec expects a further interest rate cut in November. 
 
Savanth Sebastian is an economist for CommSec
Tags: 
Interest Rates

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