The Reserve Bank has made no changes to forecasts for economic growth and underlying inflation. “It will be some time, however, before the economy reaches current estimates of full employment and inflation returns to the midpoint of the target.”

The number of loans (commitments) for home owners (owner-occupiers) fell by 2.3 per cent in December - the third fall in four months. 

The value of new housing commitments (owner occupier and investment) fell by 1.6 per cent in December. Owner-occupier loans fell by 1.0 per cent and investment loans fell by 2.6 per cent. The value of loans actually advanced was $22 billion – the second highest amount on record.

The home loan data have implications for builders, housing-reliant businesses, finance providers, retailers, and companies dependent on consumer and business spending.

· Move on, move on, nothing to see here. That is the clear message from the Reserve Bank. Interest rates are going nowhere. The defining sentence is: “It will be some time, however, before the economy reaches current estimates of full employment and inflation returns to the midpoint of the target.”

· The Reserve Bank Governor spoke last night and stressed that rates would likely remain unchanged for some time. The key area to watch is the job market, especially “how quickly spare capacity is absorbed.”

· If inflation continues to hold near 2 per cent, there will be no reason to either lift or cut rates. Of course, if you have a healthy economy, with few imbalances, that is what you want – interest rate stability. The economy is in good shape and expected to stay that way over 2018.

· Unemployment is expected to be broadly between 5.0-5.5 per cent for the next 2½ years. So-called “full employment” is near 5 per cent. So wages aren’t likely to soar, thus keeping inflation low and interest rates stable.

What do the figures show?

Key messages from the Reserve Bank report

“Over the course of 2017, the unemployment rate declined and inflation increased a little. The accommodative setting of monetary policy has played a role here. Further progress on both fronts is expected over the next couple of years. It will be some time, however, before the economy reaches current estimates of full employment and inflation returns to the midpoint of the target.”

“Strong competition among retailers is contributing to ongoing deflation in prices of consumer durables and several other retail categories; food prices (excluding volatile fruit and vegetable prices) have been broadly flat for some time.”

“The forecasts for inflation are similar to those published in the November Statement. Inflation is likely to increase gradually over time, as the economy and labour market strengthen.”

“Financial market volatility has picked up in recent days, most notably in equity markets as market participants have begun to reassess the outlook for global inflation and the speed of withdrawal of monetary accommodation.”

“Domestically, the recent run of activity data has been in line with, or a little stronger than, expectations at the time of the November Statement on Monetary Policy. The labour market has been particularly strong.”

“Household consumption growth was weak in the September quarter but indications are that it recovered in the December quarter. Consumption growth is expected to be a little above its decade average in the period ahead.”

“It is unclear whether participation rates will increase further and, if so, by how much; this represents an uncertainty around the question of how spare capacity in the labour market is likely to evolve.”

“..the unemployment rate is likely to remain above estimates of full employment in Australia for some time.”

Housing finance - number

·  The number of loans (commitments) by home owners (owner-occupiers) fell by 2.3 per cent in December – the third fall in four months. Loans are up 0.5 per cent on the year.

·  Loans by owner-occupiers for the construction of homes fell by 1.1 per cent in December – the fourth fall in five months.

·  Loans to buy newly-erected dwellings fell by 3.8 per cent in December – the biggest fall in 10 months.

·  Loans for the purchase of established dwellings (excluding refinancing) fell by 3.9 per cent in December – the biggest fall for almost two years.

·   The number of refinancing transactions rose by 0.4 per cent in December after rising 1.8 per cent in November.

·   Changes in home loan across the country: NSW (down 2.5 per cent); Victoria (down 2.6 per cent); Queensland (down 0.7 per cent); South Australia (down 1.1 per cent); Western Australia (up 1.0 per cent); Tasmania (down 2.3 per cent); Northern Territory (up 0.5 per cent); ACT (down 7.1 per cent).

Housing finance - value

·  The value of new housing commitments (owner occupier and investment) fell by 1.6 per cent in December. Owner-occupier loans fell by 1.0 per cent and investment loans fell by 2.6 per cent.

·  The value of loans by owner-occupiers and investors to build new homes fell by 5.8 per cent in December, down from a record $3.42 billion to $3.22 billion.

Housing finance – other statistics

·         The value of cancelled loans fell by 2.0 per cent in December after rising by 3.5 per cent in November.

·         Commitments actually advanced (loans made) rose by 3.2 per cent in December to 2-year highs after lifting 8.6 per cent in November.

·         The proportion of first-time buyers in the home loan market eased from a 5-year high of 18.0 per cent to 17.9 per cent in December (decade-average 17.9 per cent). 

·         The proportion of fixed rate loans fell from 15.8 per cent to a 9-month low of 14.9 per cent in December.

·         And the average home loan across Australia stood at $393,200 in December, up by 4.6 per cent on the year.

Chinese inflation

· The annual rate of consumer prices fell from 1.8 per cent to 1.5 per cent as expected in January. The annual rate of producer prices in January fell from 4.9 per cent to 4.3 per cent (forecast 4.4 per cent).

What is the importance of the economic data?

· The Reserve Bank releases its Statement on Monetary Policy each quarter. The Statement is the Reserve Bank’s assessment of economic and financial conditions and also contains the latest inflation views. The Statement is crucial is assessing the short-term outlook for interest rates.

· 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.

What are the implications for interest rates and investors?

·  Interest rates are firmly on hold. It is of little value to signal the timing or direction of rate moves at the current time.

· Investors are fretting about the potential for higher inflation and thus higher interest rates. But in China, the pace of inflation is actually easing. Even here in Australia the Reserve Bank expects inflation to hold near 2 per cent for some time and the current inflation rate is still below the Reserve Bank’s 2-3 per cent target zone.

· The steam continues to be taken out of the housing market. A healthy $22 billion was actually advanced to home buyers in December – the second largest amount ever. But exuberance has been replaced with caution.

Craig James is chief economist at CommSec.