Australian economy continues to fail to go into death spiral of higher interest rates

[Aceyducey]

A fall in the prices of Australian consumer goods and services in June has further dampened expectations of an interest rate hike, a survey said today.

The TD Securities/Melbourne Institute inflation gauge fell by 0.2 per cent in June to be 2.0 per cent higher than a year earlier. It followed a rise of 0.3 per in May.

The report attributed the fall in consumer price inflation to a substantial drop in rental prices and cheaper fruit and vegetables prices.

However, this was offset by increases in the cost of holiday travel, while prices of automotive fuel remained unchanged.

TD Securities chief strategist Stephen Koukoulas said the results suggested that monetary policy pressures in Australia were no longer skewed towards higher interest rates.

"Evidence of the fall out from the bursting of the housing bubble and the glut of property from the unsustainable construction boom showed up again in falling dwelling rents in June," he said.

"The Reserve Bank of Australia meeting tomorrow is almost certain to decide to leave official interest rates unchanged, with the low inflation outcomes opening the door for a move to an easing bias."
Source: SMH (http://www.smh.com.au/articles/2004/07/05/1089000076738.html?from=storylhs)

Cheers,

Aceyducey

[XBenX]

Acey - your post seems suprised this is the case? What are your thoughts on current MP?

[Aceyducey]

It's not surprised, it's just amusing to me that the End Of Everything as predicted by some posters continues to fail to materialise.

Cheers,

Aceyducey

[see_change]

Gee, I think it was only last week that the release of the last lots of stats was accompanied by predictions of increasing rates...

See Change

[XBenX]

It's not surprised, it's just amusing to me that the End Of Everything as predicted by some posters continues to fail to materialise.

Cheers,

Aceyducey

Haha so true =)

Just another case of me reading something into a post that isnt there!

[superted]

I believe and have said that US interest rate rises will not influence our rates till after our fed election.

To think that our rates will remain at present levels solely based on the present property situation ie low auction clearance rates, a slowing housing market, whilst the US raises rates (analysts tip .25%/month) is well, not the static (rosy) situation I imagine.

Early days yet..... maybe towards the end of the year or early next we will see what is happenning and how the trend is unfolding.

As a thought, say other issues like rising inflation and a need to be competive globally (attracting foreign investment to sustain growth) could cause a rate rise in Aus...... what would another 2 x .25% rises do for our housing market??

[Aceyducey]

I'm still waiting for that death spiral....

Do people believe it's more or less likely now than they did six months ago?

I'd particularly like to hear L Bernham's views....

Cheers,

Aceyducey

[Ausprop]

the RBA has a lot of work to do if they are to live up to BIS Shrapnels forecasts!

[househunter]

Personally Acey, I don't think it's going to happen. As a matter of fact I had my broker over last night and he told me that since the election his office has gone ballistic with loan applications. That sounds to me like a lot of people are confident with the economy and it will be business as usual.

Househunter

[likewow]

Personally Acey, I don't think it's going to happen. As a matter of fact I had my broker over last night and he told me that since the election his office has gone ballistic with loan applications. That sounds to me like a lot of people are confident with the economy and it will be business as usual.

Househunter

Interest rates will go up, its just a matter of when not if. So are we debating if they will go up or the timing of it?

My reasoning for this is because we in a historically low interest rate period and if you look at the big picture there is really only one way to go.

[Lplate]

From the media it would appear that the RBA, the Government and the banks are the ones who have been saying that interest rates could rise. If it is a scare campaign it is theirs in the making.

Many editors have added spin - especially prior to the election.

This morning Mr Howard has been quoted as having concerns about the US economy.

I suppose in this environment it is not surprising if some investors (and economists) do startle a bit.

[Thommo]

It's not surprised, it's just amusing to me that the End Of Everything as predicted by some posters continues to fail to materialise.

Cheers,

Aceyducey
I think I have been invited into this conversation but have little new to add.

I am not surprised rates are not rising but they are already high by international standards. The US must keep their rates very low or risk The End of Everything. So what can change short-term?

I've said that before though.

T

[Spiderman]

And if you want something to cheer you up, henrythornton is running a blog on the current state of the market.

http://www.henrythornton.com/article.asp?article_id=2675

henrythornton.com seems to support interest rate increases to dampen the housing market so that Gen Xers can afford home ownership. I suspect they are economists who regard lending for housing as 'unproductive investment' and support reduced government spending and debt reduction.

Regards, Peter

[Bill.L]

Hi all,

Thommo,
I think you will find that Acey was specifically referring to L. Bernham, who painted a picture of doom and gloom about a year ago. By LB's calculations, the market was going to fall about 50% by NOW! I think we can safely say that prediction was incorrect.

Peter,
I have always loved how economists regard investment for housing as unproductive. Yet the same economists would have you invest in building material companies, building companies and financiers to the housing sector. The real world dictates that you need the investment in housing for the others to prosper.

On another note, I have noticed the auction clearance rates have risen in Melbourne since the election(as reported by The Age on mondays), does anyone have similar info on other cities??

bye

[Thommo]

Thommo,
I think you will find that Acey was specifically referring to L. Bernham, who painted a picture of doom and gloom about a year ago. By LB's calculations, the market was going to fall about 50% by NOW! I think we can safely say that prediction was incorrect.


He may have been refering to LB alone. Maybe not. I've made some wild statements at times but fortunately not the 50% down one. :D

[likewow]

I think LB said a 30% drop. And i think you can safely say property has fallen 20% in parts of Australia with maybe more to come. So, guys, dont speak too soon.

Bill,

Id call the lift in clearance rates in Melbourne a dead cat bounce and i know you know what that is.

[Bill.L]

Hi all,

Likewow, the following are quotes from LB in August 03,

"I'm going to upset some people and say I expect decline of around 45-60%.

There will be a limited number of opportunitues to go on a rampage to get these bargains because by then prop investing wont be fashionable anymore and will have a higher risk weighting attached to it so banks will demand lower LVRs.
Also a lot of the equity people have in their investments will just disappear so I think we will see a lot of sellers and only a relatively small number of buyers. The only way the banks will approve loans is to people with cold hard cash.

I love property as an investment (just not now) and am fully cashed up ready to take advantage of some good prices.

I think everyone should look at what position they would be in if my prediction were to be accurate. Who would actually be in a position to buy more IPs?
Sorry, but all booms must come to and end sometime. Be glad you were in it from the start if you were indeed so lucky."


"I should also say that its not going to take a trigger, like an interest rate rise.
All it needs is a change in sentiment.

I cant predict what areas it will begin or end. I'll leave that for someone else to guess.

It will be shorter and sharper than many anticipate as opposed to a slow decline.

I think we will start seeing better evidence of the downturn in the next few months. But I'm not scared to admit that I could be wrong on the timing."

As I said earlier, I think we can safely say that prediction was wrong.

[Ross Sondergeld]

Hi...


Firstly, I'm not an economist.

But... i saw a National Australia Bank interest rate forcast document, specifically prepared for a financial group. And interest rate movement were...

Pretty much level... for the medium term.



Ross

[likewow]

Hi all,

Likewow, the following are quotes from LB in August 03,

"I'm going to upset some people and say I expect decline of around 45-60%.

There will be a limited number of opportunitues to go on a rampage to get these bargains because by then prop investing wont be fashionable anymore and will have a higher risk weighting attached to it so banks will demand lower LVRs.
Also a lot of the equity people have in their investments will just disappear so I think we will see a lot of sellers and only a relatively small number of buyers. The only way the banks will approve loans is to people with cold hard cash.

I love property as an investment (just not now) and am fully cashed up ready to take advantage of some good prices.

I think everyone should look at what position they would be in if my prediction were to be accurate. Who would actually be in a position to buy more IPs?
Sorry, but all booms must come to and end sometime. Be glad you were in it from the start if you were indeed so lucky."


"I should also say that its not going to take a trigger, like an interest rate rise.
All it needs is a change in sentiment.

I cant predict what areas it will begin or end. I'll leave that for someone else to guess.

It will be shorter and sharper than many anticipate as opposed to a slow decline.

I think we will start seeing better evidence of the downturn in the next few months. But I'm not scared to admit that I could be wrong on the timing."

As I said earlier, I think we can safely say that prediction was wrong.

WOW! I apologise, i thought he said 30%. He must have been on something that particular day. :D

I would like to add to your last sentence "so far". Remember, nothing is permanent and nothing is temporary.


Can you give me a link to that particular thread?

[Bill.L]

Hi likewow,

This thread

http://www.somersoft.com/forums/showthread.php?t=11113

LB did later moderate his prediction, especially when it wasn't happening.

In which areas have you noticed the 20% decline???, apart from the apartment market which every man and his dog knew was going to drop.

LB's predictions were not just for apartments, they were for residential property on average. Since his first predictions of gloom and doom, property owners in outer Brissy have gained a lot of equity( and there are probably other areas as well such as See-ch's Rocky)

bye

[likewow]

Plenty of areas in Sydney you can get properties at big (10-20%) discounts to list price without trying too hard and the asking prices are way below a year ago (at least 15%). Properties are sitting on the market for ages but yields still suck but getting better.

Inner West Sydney, Central & Mid North Coast NSW and Sydney Hills District come to mind but pretty much anywhere and everywhere prices have gone south drastically in NSW as supply builds up and demad has dropped off.

I own 4 houses around Brissie and keep my eye on the market there closely. After peaking at the end of last year they have been flat or down a little . I sold one property there 4 months ago and it wasnt too easy to get the price i could have got late last year and i had to settle for a bit less.

Thanks for the link.

[XBenX]

Who needs LB - hasnt his view been posted anyway :wink

Anyway my POV for what its worth - Id be disapointed if the board let it get to the death spiral stage...so I think its highly unlikely.

[Spiderman]

Peter,
I have always loved how economists regard investment for housing as unproductive.

To them property is a consumer good, only slightly less evil than depreciating consumer electronics imports.

To add insult to injury these items are largely fuelled by the borrowing binge that is swapping real money for pap. While crowding out productive uses for those funds and reducing living standards in the long-term.

Our economy is built on waste and the most visible manifestations of it are consumer goods, too many spare rooms in the house, spare seats in the car and long working hours.

If only, if only, the people weren't so stupid and flippant with their money, and they understood what 'opportunity cost meant', we'd be better off. Our productivity would be high enough to be either 1. the richest people on earth or 2. able to sustain a high standard of living while working an average of 3-4 hours a day.

1. requires a consumer market of highly borrowing foreigners to buy our exports while 2. would produce a massive boredom epidemic that most people, lacking creativity, would fix by buying consumer goods (or committing crime or suicide).

Of course this implies a certain (negative and sneering) attitude towards society on the part of our economists. But if they also argue that 'the market is always right' and the virtues of people exercising choice (however bad that might appear) then that's the opposite viewpoint!

Probably the best position to be is an investor in a mass consumer society, which is where most forumites are at the moment ; )

Regards, Peter

[willair]

There is a preception in some quarters that property will drop in value,
i went to the qld main roads auctions last week,several properties
sold on that day,nothing is cheap anymore,and from what i see everyday in inner
city brisbane in the last three weeks the sold signs are starting all over again.

good luck
willair..``

[Peter 14.7]

Hi All

Sometimes the economy is like a Rubik’s Cube, just when you get one side the right color you stuff up the other side.

Interesting that inflation is being held down by lower rental prices? And that fuel had not shown an increase. From all I read Fuel will show it's effect on the CPI in December Quarter and it will be significant.

I am also not surprised that rental drops has played a part in lowering CPI.

I have seen in Inner City Sydney 90% of every street or even laneway (without exaggeration) has had a new unit block built on it in the last five years. That is every street, not some, not most but 90% of everyone. Even my street (very short) saw a warehouse spilt in two residences. The street next up 2 terraces into 30 units. The next street up 1 commercial office site into 20 units. In this small area alone (100 x 100m square) we have gained 50 residences.

At a guess the number of dwelling in Surry Hills alone must have doubled since 1999.
So those will hopes of rental rises don’t want to be looking here. Oh course this will offset fuel and hence the Rubik Cube analogy.

BTW there is lot of units to come on line here and I already know of some pretty good deals in older blocks as speculators are getting out and into the next big thing.

Peter 147

[Mark_B]

Sometimes the economy is like a Rubik’s Cube, just when you get one side the right color you stuff up the other side.


What Peter says is spot on - it is a Rubiks cube of sorts - and it is very hard to get all the sides right at the same time.

One of the first things that students of economics learn are what generally accepted to be the four main aims of economic policy, which in no particular order are:

- Price stability (a low stable CPI)

- Economic Growth (Real GDP per capita)

- External Balance (a low CAD)

- Full employment (with allowance for "normal" levels of structural / cyclical / frictional unemployment)



How they can be incompatable


If you shoot for a low CPI you can retard both economic growth and the achievement of full employment.


Economic growth can lead to full (or fuller) employment, but puts upward pressure on prices and on the CAD.


External stability is less of a problem under a floating exchange rate - but it must be remembered that the foreign debt (like all debts) must be repayed and has interest payable on it. Increases in foreign debt can reduce what is known as GNDI (Gross National Disposable Income) - the same way that increased borrowings of an investor can reduce their net disposable income.


If you go for full employment - you can get economic growth, but may have to sacrifice stability of the CPI and external balance.



The 4 aims in a bit more detail


1. price stability.

This means that the Consumer Price Index (CPI) is in check. It does not mean deflation (price falls), but it does promote the virtues of steady inflation (double digit inflation would be considered excessive).

High inflation brings with it numerous costs. Notwithstanding the erosion of the purchasing power of each dollar which I am sure everyone here is familiar with (this is the main cost of inflation where real incomes are not maintained), other costs include:

a) Adjustment costs - price lists and prices have to be continually adjusted to keep current with CPI

b) Search costs - the higher the CPI, the greater effort that consumers will put into making informed choices in an attempt to find the cheapest prices



2. full employment.

This does not mean 0% unemployment and to be truthful, zero unemployment is a bit of an economic fantasy and would only occur in la la land.

Structural unemployment - unemployment that has arisen out of a change in the nature of the economy - eg. job losses arising to a deteriorating car manufacturing sector.

Cyclical unemployment - unemployment that has a seasonal component, eg. fruit picking, etc.

Frictional unemployment - people who are between jobs (they have left one job and have another to go to but are not yet employed in that job).

Long-term unemployment - I am not aware of the official definition, but the long term unemployed are those who have been out of work and actively looking for work for a given period of time - it could be 6 months, a year, etc. The longer they are out of work the greater they suffer from what is known as skill atrophy (where their skills slowly fade away).

Hidden unemployment - Persons without a job who have stopped actively seeking work and are no longer classed as unemployed (they don't appear in the unemployment figures).

Occasionally you will hear Economists speak of the Non-Accelerating Inflation Rate of Unemployment (NAIRU). This is a lovely little economics concept that seeks to justify a particular point of equilibrium in labour markets. The NAIRU (if it really exists) would be a level of unemployment where the supply and demand conditions in labour markets are such that real wage increases or decreases did not occur.

The NAIRU arose out of the study of the Phillips curve which demonstrated an observed negative correlation between the rate of unemployment and CPI. This correlation persuaded some analysts that it was impossible for governments to simultaneously target both unemployment and price stability, and that, therefore, it was government's role to seek a trade off between unemployment and inflation which matched a some social consensus.


3. Economic growth

Economic growth is essentially just a rise in Gross Domestic Product (GDP). But this it itself is not neccesarily a good thing.

After all, GDP should rise by itself owing to (a) inflation, and (b) population growth.

Therefore a more meaningful measure of economic growth is tracking Real (inflation adjusted) GDP per capita (per person).

According to the CIA Factbook (http://www.cia.gov/cia/publications/factbook/geos/as.html), Australia's GDP per capita was about $USD 29,000 in 2003.


4. external balance

Essentially we are talking about Australias net financial transactions with the rest of the world.

As you can see from this graph (http://wopared.parl.net/library/pubs/mesi/mesi65.htm), Australia's net foreign debt is about $400 billion dollars.

Our gross foreign debt (http://wopared.parl.net/library/pubs/mesi/mesi65.htm) is around $650 billion dollars. Of that $73 billion (or about 11%) is attributable to the public sector (governments). While the remaining $580 billion (89%) is owed by the public sector.

Depending on which theory you subscribe to, we should either be:

a) actively trying to reduce it and really worried that we have a large FD and that it keeps growing. The concern is that the repayments will grow so large that from a national accounting perspective an inordinate amount of each domestic dollar earned will go overseas (and not stay in Australia).

b) not worried. Most of the debt is attributable to the private sector. This approach holds that the people who lend money fully expect that it can be repaid. And if it is not repaid, then it gets written off.


One of the indirect benefits of the Superannuation Guarantee is that it has curbed the growth of our foreign debt by adding to "national savings". As national savings has increased, our need to borrow from overseas to pay for the goods and services has fallen (compared to what it could be).




So what does the Government aim for?


At various points in time different policy aims have taken priority over others.

The interest rate hikes of the late 1980's and early 1990's were seen as being aimed at the CAD (in a vain attempt to curb Australian's apparently insatiable appetite for imports).

These days interest rates are pretty much solely focussed on the CPI.

Recent fiscal initiatives such as the GST and the reduction in company tax where indirectly aimed at fostering economic growth. By flushing out much of the black economy the GST has added to economic growth (while also being a great revenue raiser for government). The company tax rate cut (as an example) indirectly encourages greater spending on capital goods (the means of production) - through which longer term growth can come.

IMHO, external balance is well and truly off the radar at the moment. Sure we hear the figures ($1 bn this month, $2bn the next), but I don't detect any real commitment to reducing the CAD or FD.

And as for employment, again IMHO, I see that as being a secondary aim. If it was not a secondary aim we would not still have more than 500,000 unemployed. And if it is a primary aim, then all I can say is that the policies are not working.

MB

[XBenX]

I have always loved how economists regard investment for housing as unproductive.

Someone has been reading up on the productivity commission =)

I dont think its a very good generalisation to make though.....

As with most things in economics you can make cases for both arguements - New housing is actually an investment

[Aceyducey]

Plenty of areas in Sydney you can get properties at big (10-20%) discounts to list price without trying too hard and the asking prices are way below a year ago (at least 15%). Properties are sitting on the market for ages but yields still suck but getting better.
And the areas in Sydney we watch have risen by 10% this year.

It all depends where you look really :)

Cheers,

Aceyducey

[likewow]

And the areas in Sydney we watch have risen by 10% this year.

It all depends where you look really :)

Cheers,

Aceyducey

Thats amazing, could you give me a rough idea to what part of Sydney have gone up 10% this year? Or even the exact suburbs. I'd love to see proof if you have any because im feeling slightly sceptical.

[Aceyducey]

Sorry Likewow,

You'll have to do your own research :)

Cheers,

Aceyducey

[likewow]

Sorry Likewow,

You'll have to do your own research :)

Cheers,

Aceyducey

Thought you might say that :) Im not in the market especially in Sydney with the crap yields. I find it incredible that some areas can rise 10% while those around it are static or falling.

I saw on the news last week a house in Blackett (suburb near Mt Druitt) sold for $120k, private sale. It mighn't have been arms length and it was a very average house (but livable) but that price is amazing at the end of 2004.

They were also going on about houses being sold for $300k below the asking, admittedly expensive house ($1.5 mill). Did anyone see that story? As there was no mention on here.

[np2003]

Everyone seems to be basing the economy, weather, etc on its history. Just get ready because unexpected events will hit us. It will not be tommorrow, a few weeks later or even a few years later but it will happen during a time when everyone thinks the economy is doing well and all is fine. It will come and it will SHOCK everyone, just like all the events leading up to all the elections, recent weather events, etc. How many times have you, your friends, family members and an entire country said "how could that be?"

Change is here, just not yet.

[Aceyducey]

And unexpected events or change doesn't have to be bad either :)

Cheers,

Aceyducey