Tag Archives: Reserve Bank

Timely warning for home buyers

As fears for the stability of the global financial system continue to ease, the thoughts of a central bank inevitably turn to more home grown concerns.
So it is that the Reserve Bank of Australia has issued a timely reminder to homebuyers that interest rates will not remain at record lows indefinitely.
In its biannual stocktake on the health of the local and international financial system, the Financial Stability Review, the RBA has devoted some attention to developments in the local property market.
This is hardly surprising – as the US sub-prime crisis so spectacularly demonstrated, what goes on in real estate can have explosive and devastating consequences for the rest of the economy.
Low interest rates are usually seen as a good thing (except by those trying to live off interest-bearing investments), but they come with risks.
The longer that rates stay low, the more desperate the competition among lenders for customers, and the greater the temptation for borrowers to increase their debt.
While rates stay low, many borrowers may be comfortable servicing their loan. But, inevitably, rates will rise, and as the financial squeeze increases, an increasing proportion of borrowers may find themselves in over their heads. And if they can’t unload their assets at a price to cover their debt (as can occur when many people simultaneously find themselves in trouble) things can get ugly very quickly.
This is the scenario the RBA is keen to avoid, and explains why it is watching borrowing behaviour and lending practices like a hawk.
It warned in today Review that there are already “indications that some lenders are using less conservative serviceability assessments when determining the amount they will lend to selected borrowers”.
It goes on: “It is important for both investor and owner-occupiers to understand that a cyclical upswing in housing prices when interest rates are low cannot continue indefinitely, and they should therefore account for this in their purchasing decisions.”
In other words, don’t bank on the idea that the recent surge in house prices will be sustained. If you are borrowing to your limit to buy a house, don’t be surprised when interest rates eventually go up, and the price you paid turns out to be at the top of the market.
None of these dangers are in immediate prospect.
The international economic recovery is still in its early days, and subdued local growth means there is little pressure at this stage to inch official interest rates higher.
But, while financial markets don’t expect the RBA to begin tightening monetary policy until at least early next year, the RBA might be tempted to act sooner if it sees a risky build up in household debt.

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Is there a case for a February interest rate hike?

The rate hike hares are running following evidence that shoppers are spending more freely and building approvals are back to levels last seen almost three years ago.

In a sign that the stimulus from low interest rates is sustaining an improvement in consumer outlook despite the soft employment market and federal budget gloom, retail sales rose 0.7 per cent in November to be up 4.6 per cent from a year earlier, while building approvals remained at their healthiest level in years, despite a small retreat from the previous two months.

The solid readings have led at least one prominent economist to predict the Reserve Bank of Australia will soon have to begin raising interest rates in order to ward off the risk of a surge in inflation.

Market Economics managing director Stephen Koukoulas said today the economy “is on fire”, and that the Reserve Bank Board should lift its cash rate when it returns for its first monetary policy meeting of the year on February 4.

The latest readings on the economy follow the release of figures last week showing the nation’s trade deficit narrowed significantly in the second half of 2013, a trend that is expected to continue as the completion of major resource infrastructure projects boosts the nation’s export capacity.

After reaching above $1.5 billion in mid-2013, the deficit had shrunk to little more than $110 million in November, and anecdotal evidence indicates there was strong growth in iron ore export volumes last month.

Adding to the picture, a Dun & Bradstreet survey released earlier this week indicated that business is becoming increasingly upbeat about its investment and employment intentions.

But worries about the health of the jobs market remain.

According to the Australian Bureau of Statistics, monthly job vacancies have been in a sustained decline since reaching a peak of almost 190,000 in early 2011. In November last year, the ABS reported, there were barely 140,000.

In its mid-year update on the economy, Treasury was downbeat on the labour market, predicting the jobless rate would rise to 6.25 per cent next financial year as the economy grew at below-trend rate.

But, as Kouloulas points out, the jobs market is a lagging indicator of economic activity, and the latest economic data suggest Treasury may have been too pessimistic.

For instance, between August and December it cut forecast dwelling investment growth from 5 to 3 per cent, though as it itself admitted, “finance commitments for new dwellings are now 12.4 per cent higher than a year ago and building approvals have improved noticeably from their trough in early 2012. Higher house prices could initiate a stronger investment response”.

The risk for the RBA is that, if it misreads the situation, a rate hike in the next month or so might puncture nascent optimism and slow or stall (at least temporarily) the recovery in non-mining sectors of the economy.

The risk is heightened by the Federal Government’s tub-thumping on the state of the Commonwealth Budget and looming threat of significant cuts in public sector spending.

In addition, raising rates could help reinflate the Australian dollar, something the RBA would be keen to avoid (one of this blog’s correspondents, @MrMacroMan, said that an RBA official speaking in New York overnight was “very clear on AUD risk and rates on hold”).

Yet, if analysts like Koukoulas are correct and the economy is taking off, an official interest rate of 2.5 per cent would obviously be inappropriate, and could sow the seeds of dangerous price pressures down the track.

As RBA Governor Glenn Stevens might say, the decision may come down to which is the path of last regret.

Fortunately for it, more evidence about the strength of activity is due to be released before the 4 February meeting, including finance and employment figures, as well as construction activity numbers.

In the meantime, markets are likely to be busily recalculating the odds of a rate move at next month’s meeting.

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