Reserve Bank raises concerns on housing: Savanth Sebastian

Reserve Bank raises concerns on housing: Savanth Sebastian
Reserve Bank raises concerns on housing: Savanth Sebastian

GUEST OBSERVER 

The minutes of the March Reserve Bank Board meeting certainly provides interesting reading.

While policymakers are relatively optimistic about the medium term outcomes for the Australian economy, there is clearly a number of ‘hot button’ issues that occupy policymaker thoughts.

To a greater extent it seems that central bank officials are ramping up their discussions and commentary on the housing sector.

In what could be described as the strongest language yet, the minutes discuss the “build-up of risks associated with the housing market”. In particular, the second to last paragraph of the minutes essentially lists a number of these risks, including “briskly” rising home prices; “a considerable” lift in additional supply of apartments scheduled to come on stream over the next few years; slowing growth in rents; rising investor finance; and - probably most concerning - the growth in household debt outstripping incomes. No doubt it is an evolving situation that the Reserve Bank will monitor closely over the coming year. 

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Reserve Bank raises concerns on housing: Savanth Sebastian

When it comes to the broader economy, the Reserve Bank believes that economic growth and inflation will lift over 2017, ruling out the need to cut interest rates further. If the forecasts were to change and the Reserve Bank became less positive, rate cuts would clearly be back on the radar screen, but the Bank believes risks are balanced. Rate hikes seem some way off.

The Reserve Bank has highlighted that the issues surrounding the housing sector. And while the latest ABS data on residential property prices also confirms the sizeable lift in home prices, data shows the growth in the number of homes is actually smaller in the past 12 months. Surprisingly the number of homes in Australia grew by 172,800 in the year to December after recording annual gains of 185,800 in the year to September and 182,400 in the year to June. It was the smallest annual lift in homes for 15 months.

Consumer confidence eased over the past week with consumers more negative on the outlook for the economy. In fact the reading on economic outlook over the next five years, hit a one-year low. Interestingly the readings on family finances has also weakened in the last few weeks. And while consumers are far from glum, there is no doubt the discussions on potential risks to the housing sector are adding a degree of caution.

Inflation expectations of consumers fell last week to the lowest reading since the start of the year although it still remains above 4 per cent.

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Reserve Bank raises concerns on housing: Savanth Sebastian 

What do the figures show?

Reserve Bank Board minutes:

Last two paragraphs: “Given all of these considerations, the Board judged that holding the stance of policy unchanged at this meeting would be consistent with sustainable growth in the economy and achieving the inflation target over time.”

“Recent data continued to suggest that there had been a build-up of risks associated with the housing market. In some markets, conditions had been strong and prices were rising briskly, although in other markets prices were declining. In the eastern capital cities, a considerable additional supply of apartments was scheduled to come on stream over the next few years. Growth in rents had been the slowest for two decades. Borrowing for housing by investors had picked up over recent months and growth in household debt had been faster than that in household income. Supervisory measures had contributed to some strengthening of lending standards.”

“Momentum in the labour market remained difficult to assess, but it was clear that spare capacity remained and there continued to be significant differences in labour market outcomes across the country. Domestic wage pressures remained subdued and household income growth had been low, which, if it were to persist, would have implications for consumption growth and the risks posed by the level of household debt.”

“GDP growth had picked up in the December quarter to be around 21⁄2 per cent over 2016, which was only a little below estimates of the medium-term potential growth rate of the economy. This outcome confirmed that the weakness in the September quarter was temporary. Looking forward, year-ended growth was expected to pick up gradually to be above its potential rate over the forecast period. An appreciating exchange rate would complicate the adjustment of the economy following the end of the mining investment boom.”

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Reserve Bank raises concerns on housing: Savanth Sebastian 

“Domestically, there had been a significant increase in the terms of trade in the second half of 2016 and many commodity prices had risen further in recent months. Although mining companies were expected to increase their dividend payouts following the sharp rise in mining sector profits in the December quarter, a significant proportion of shareholders are non-residents, which would limit the flow-through to an increase in household incomes in Australia.” 

Consumer confidence

The ANZ/Roy Morgan consumer confidence rating fell by 1 per cent to 112 in the week to March 19. Confidence is down 3.4 per cent over the year and below the average of 113.2 since 2014. Two of the five components of the index fell in the latest week:

The estimate of family finances compared with a year ago was up from +5 to +6;

The estimate of family finances over the next year was steady at +21;

Economic conditions over the next 12 months was down from zero to -3;

Economic conditions over the next 5 years was down from +7 to +3;

The measure of whether it was a good time to buy a major household item was up from +32 to +33;

In addition the inflation expectation 2 years ahead, fell from 4.7 per cent to 4.1 per cent. Inflation expectations have now held above 4 per cent for the past 14 weeks.

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 4.1 per cent in the December quarter 2016. The index rose 7.7 per cent through the year to the December quarter 2016.

The capital city residential property price indexes rose in Melbourne (+5.3 per cent), Sydney (+5.2 per cent), Brisbane (+2.2 per cent), Adelaide (+1.8 per cent), Canberra (+2.8 per cent), Hobart (+4.5 per cent) and Perth (0.3 per cent), and fell in Darwin (-1.5 per cent).

Annually, residential property prices rose in Melbourne (+10.8 per cent), Sydney (+10.3 per cent), Brisbane (+3.8 per cent), Adelaide (+4.1 per cent), Canberra (+5.5 per cent) and Hobart (+8.8 per cent), and fell in Perth (-4.1 per cent) and Darwin (-7.0 per cent).”

The ABS notes that as at December 2016 there were 9.802 million homes in Australia.

“The total value of residential dwellings in Australia was $6,438,537.3m at the end of the December quarter 2016, rising $274,160.0m over the quarter.

The mean price of residential dwellings rose $25,400 to $656,800 and the number of residential dwellings rose by 39,600 to 9,802,700 in the December quarter 2016.”

CommSec estimate that there were 2.476 people per home in December quarter 2016, down 0.4 per cent on a year ago. The number of people per home have been falling in annual terms for 2 1⁄2 years.

Surprisingly the number of homes in Australia grew by 172,800 in the year to December after recording annual gains of 185,800 in September and 182,400 in June. It was the smallest annual lift in homes for 15 months.

CommSec estimates that wealth accumulated in housing assets rose by $10,547 per person in the December quarter to $265,276. 

The number of transfers (settlements) of houses and attached dwellings in Sydney in the December quarter was the lowest for any December quarter for the past 11 years.

What is the importance of the economic data?

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.

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 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.

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.

When it comes to ‘hot button’ issues it’s clear that policymaker concerns are clearly centred on the housing sector. Healthy home prices have been a key driver of rising wealth levels, supporting spending. But the Reserve Bank is worried about the lift in debt levels to buy homes.

If the recent drop in consumer confidence is sustained it could lead to less household activity – a detriment to retailers. 

Savanth Sebastian is an economist for CommSec

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Interest Rates

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