RBA keeps rates on hold, mentions rising house prices

[MichaelW]

Hi Guys,

I must be going blind, but I can't find any threads on the RBA rates outcome today. Are we all that complacent now?

Anyway, rates on hold and some good messages in the media release:

Media Release

At its meeting today, the Board decided to leave the cash rate unchanged at 3.0 per cent.

The global economy is stabilising, after a sharp contraction in demand during the December and March quarters. Downside risks to the outlook have diminished, with conditions in global financial markets improving this year and action to strengthen balance sheets of key financial institutions under way. Growth in China has strengthened considerably, which is having an impact on other economies in the region, including Australia.

A pick-up in housing credit demand suggests stronger dwelling activity is likely later in the year. House prices are tending to rise. Business borrowing, on the other hand, has been declining...

Nice! OK, so they accept that they've eased monetary policy into the expansionary range and are getting traction in the property market, happy days! But they also state that because businesses are still doing it tough there's no rush to raise rates and put a stop to the property market recovery.

Gotta love that outcome.

Cheers,
Michael

 

[Ausprop]

yes hard to believe that the world is supposedly ending and the RBA is just ambling along with the highest official rates in the western world

 

[Propertunity]

Yes, it seems a bit incongruous that we are coming out of something that we haven't even seemed to have gone into yet

 

[Propertunity]

So the RBA has only one lever maked "interest rates". They want to drop them for business but raise them for housing. How many times have home owners and investors suffered when it has been the other way around? - this situation is simply delicious

 

[Peter_Tersteeg]

Here's my take on todays lack of much at all from the RBA...

The Australian economy is doing fairly well. It's reasonable to say it could still use a little pushing, so a small rate cut wouldn't be out of the question.

The problem is that lenders have pretty much said that it wouldn't be passed on, so if a 0.25% cut was made, it would be held in back by the banks and not really flow to the rest of the economy.

To get the banks to make any changes, the rate cut would have to be significant which really isn't justified at the moment. There is the threat of rates moving up quickly (but who knows when). A disproportionate rate cut would be the thing that triggers this, so why risk it.

 

[MichaelW]

this situation is simply delicious

It is indeed...

OK, so we already have traction in property but the RBA gives us this heads up:

The Board’s current view is that the outlook for inflation allows some scope for further easing of monetary policy, if needed. In assessing how it might use that scope, the Board will continue to monitor how economic and financial conditions unfold and how they impinge on prospects for a sustainable recovery in economic activity.

They're saying that there is scope to ease rates further but they'll watch economic activity in making that call to ensure a sustainable recovery. But business lead indicators are all still a bit negative and banks haven't passed on rate cuts to businesses as much as to mortgage holders. There is a real risk that raising rates from here would quell any economic recovery. So the most likely outcome is the RBA will keep rates on hold for the next 6-12 months to stimulate recovery and in doing so accept a stronger than desired performance in the property sector. It will, in all probability, be the property sector that leads us out of this recession IMHO.

Delicious indeed...



Cheers,
Michael

 

[steveadl]

SThey want to drop them for business but raise them for housing. How many times have home owners and investors suffered when it has been the other way around? - this situation is simply delicious

Owners and investors will suffer if business suffers from lack of credit. It's not a scenario I would describe as delicious.

 

[WinstonWolfe]

Owners and investors will suffer if business suffers from lack of credit. It's not a scenario I would describe as delicious.

I think the RBA favor not dropping rates in order to retain a competitive advantage in attracting foreign capital, which the Australian economy is now seriously dependent on. Whether a recovery is fueled primarily by private bank borrowing or govt debt issuance, higher rates will attract foreign funds that much easier.

If we can't attract foreign funds, then the option is to do what Obama did = central bank buys govt bonds.

But that only solves the public sector part of the problem, because our domestic savings rate is still too shoddy to provide the capital local banks require to finance our recovery (and prop up our property prices)

Further, higher rates support demand for the AUD, and thereby benefit our terms of trade.

So what the RBA are actually masking, is that Australia is living beyond its means, cannot fund its lifestyle out of domestic savings, and has to pay a premium to attract foreign capital to keep funding it.

edit: I think the other consideration is the RBA are using caution in encouraging financing of oversupply. There is no point Australia stimulating domestic economic activity if we don't draw increased export income from it (esp if we have to borrow foreign capital to stimulate). Therefore, until a global economic recovery looks in the bag, stimulating the Aussie economy with lower rates, would only increase foreign debt, but wouldn't contribute to net export income. This would leave us with a worse Balance of Payments.

In my view, Aussie property prices will gradually become more sensitive to Balance of Payments, because BoP will be dictating credit conditions.

 

[Propertunity]

Owners and investors will suffer if business suffers from lack of credit. It's not a scenario I would describe as delicious.

You may have misunderstood what I was trying to say in a round-about way.

The RBA will likely drop IRs to get business back on track but in so doing will also be dropping IRs on housing loans (even though they really don't want to because as they already acknowledge, house prices are going up) - because they don't have 2 levers for IRs - one for business and one for housing.

Dropping IRs is what i was saying is delicious (not drying up credit for business). They need to do so to stimluate business activity and more house price rises will be a side effect.

 

[steveadl]

Fair enough Prop, see your point.

I'd love to see rates drop further but don't think it's on the cards anymore. For what it's worth though, even if we did have another drop I doubt much would have been passed on to commercial. WW raises a good point, we need more foreign lending again.

Biggest problem is banks will wait until things have calmed down again before they start going back to normal business lending with it's increased risk profile. But businesses need funding in the interim which I guess is the catch 22.

 

[craigb]

Question ? When was this information, coalated, so mr stevens can give this speech, ? 1 month ago or 3, months ago, ?

 

[boz]

My view is that rates can go lower to at least 2.5% with no problem to find overseas money coming into the country (look at NZ for example with lower interest rate and only AA debt rating).
I have a different read of MichaelW of this:

A pick-up in housing credit demand suggests stronger dwelling activity is likely later in the year. House prices are tending to rise. Business borrowing, on the other hand, has been declining, as companies postpone investment plans and seek to reduce leverage in an environment of tighter lending standards. Large firms have had good access to equity capital, which is assisting in strengthening their financial structures.

I read it as a warning to government to focus its help (money) to small business and not wasting it to fuel higher home prices.
I don't quite agree with his view of stronger dwelling activity later in the year, construction industry is still shrinking (data from yesterday) and also latest new house building activity was not good. tomorow a very important leading indicator of home loans for may is coming out and my view is that will be lower then the 1.3% increase expected. So data about the future could change very quickly from the view of RBA.

 

[boz]

Hi,

This move by RBA is really not in the interest of investors.

In this econominc downturn there are some available bad credit commercial loans, although they are more difficult to obtain since having a bad credit can make the bank hard to rely on particularly on the new business. But at least you have the options, and if you are dealing with the bad credit, you have to work with the commercial loan which is also designed for this same purpose. And most importantly, you are also having an access to the capital by just borrowing against the future paydays or whatever thing may come in

I don't see as investor the one they need to borrow money to put in a business. To me investor are the one that have money and they decide where to invest it, for sure contained inflation is much more welcome then rising inflation and destabilisation of the entire economy.
Also now current businesses are struggling and I don't think it is generally bad to have a brake on new business entering in the market (and compete against each other)

 

[Aaron Sice]

watch your gearing folks - i smell a rat.

 

[WinstonWolfe]

My view is that rates can go lower to at least 2.5% with no problem to find overseas money coming into the country (look at NZ for example with lower interest rate and only AA debt rating).
I have a different read of MichaelW of this:

It isn't that we can't attract foreign capital per se, but rather, the price we pay for that capital.

NZ is certainly a lot worse off than us with a CAD/GDP 9%, NFD/GDP 90%+
AU CAD/GDP recently down from 6.5% to 3.3% and NFD/GDP 62%

NZ cash rate is 2.5% Aussie 3%

But then compare ANZ resi mortgage rates.

AU NZ
V 5.81 6.45
1 5.35 5.5
3 6.34 6.99
5 7.19 7.99
(from ANZ websites)

Despite the Kiwis having a lower cash rate, their variable and fixed rates are higher.....I'd presume some difference is due to variation in economies of scale, but the rest due to the higher risk associated with their poorer CAD and NFD.

The NZ rates also highlight that there very well might not be any point in the RBA dropping the cash rate in pursuit of monetary easing....certainly not by the NZ experience.

Things might also be a lot worse for NZ if currency markets didn't bundle it with the AUD so tightly.

 

[boz]

It isn't that we can't attract foreign capital per se, but rather, the price we pay for that capital.

NZ is certainly a lot worse off than us with a CAD/GDP 9%, NFD/GDP 90%+
AU CAD/GDP recently down from 6.5% to 3.3% and NFD/GDP 62%

NZ cash rate is 2.5% Aussie 3%

But then compare ANZ resi mortgage rates.

AU NZ
V 5.81 6.45
1 5.35 5.5
3 6.34 6.99
5 7.19 7.99
(from ANZ websites)

Despite the Kiwis having a lower cash rate, their variable and fixed rates are higher.....I'd presume some difference is due to variation in economies of scale, but the rest due to the higher risk associated with their poorer CAD and NFD.

The NZ rates also highlight that there very well might not be any point in the RBA dropping the cash rate in pursuit of monetary easing....certainly not by the NZ experience.

Things might also be a lot worse for NZ if currency markets didn't bundle it with the AUD so tightly.

Hi WW,
I don't see that bad the current account deficit of NZ, they are coming from over 1 year of recession and they are closer to living within their mean then Australia, I think latest NZ data is close to a trade surplus while Australia is getting very negative and will get worse in the next few months. In any case I like more the economy of australia and I prefer to speculate against the NZ$ when it trade below 1.26-1.27 against the AU.
I think one reason of higher lending rate in NZ (on top of the one you point out and credit rating) is higher history of inflation and the long term currency movement always see the kiwi underperforming Australia.
EDIT:
NZ last CAD is 1.25 BIL NZ$ for the 1st quarter that is the lowest in over 4 years (australia was -4.6 bil AU$ but was dodgy data and will be revised down)

 

[WinstonWolfe]

Hi Boz,

If you are trading NZD, check their treasury dept. monthly economic indicators.

NZ trade balances.
Apr 318m+
May 858m+
Trade deficit ytd is 3b.

However, these trade surpluses don't compensate net international investment income, which is around -13b ytd, and fueling their CAD.

Current Account = goods + services + investment income + current transfers

Investment income debits comprise mainly the interest paid by their banks on borrowed foreign wholesale funds, around 30% of total bank liabilities (similar to Austalia).

Their net foreign debt is now 98% of gdp 177b/180b, which is a lot of debt to pay interest on.

Their CAD (last 4 qtrs to Mar09) is 15b (8.5% gdp), and even with a couple of 1b trade surplus months, it is unlikely net foreign debt would drop significantly to help bring CAD down.

NFD and the interest to service it is what all deficit nations have to square up to over the next 10 years, especially if rates demanded for foreign capital rise along with oil....There's been a general view post Keating, that CADs are ok. However, large NFDs requiring signfiicant GDP to service, make a country vulnerable to external shocks.

And external shocks and loss of economic power, will be the name of the game for the next 10 years. Australia is getting a little taste of that this week, in China detaining the RioTinto sales team for iron ore price manipulation. And the G8 are starting to talk frankly about the repercussions of foreign debt

 

[boz]

Thanks for the link WW,
i usually don't check the year average indicators and focus more on last numbers and the one coming up. i agree that Australia is better placed, specially if the financial situation deteriorate again, but for sure NZ is more on the right track to get out of it then australia, and NZ is nailing positive trade number while Australia is heading the other way. So if in the 1st quarter Australia account deficit was only 5 times the one of NZ, I would expect the 2nd quarter or soon after to get a 10 times difference (you would have to consider around 8 times the gdp and population difference).
I actually don't have many position open this week, I am in a kind of holiday over in europe and busy with other things. I have a short open on the AUD/CAD and planning to go long on the eur/nzd when I spot the right moment. I also started to shorten the S&P500 at any bouce up (but i closed my short today just before the US market closed)

 

[topcropper]

It will, in all probability, be the property sector that leads us out of this recession IMHO.

This could be in interesting topic to discuss.

Is it possible that property could lead us out of recession..??
[that's assuming we even had a recession].



Lets break property into two parts.

First part, the property construction industry, as in constructing residential houses and units, commercial buildings and infrastructure.

And the second part, property real estate, simply the sales and buying side of existing property.



Now I can easily see how the property contstruction industry could lead any country out of recession. Property construction is a massive industry, probably as big as any, employs hundreds of thousands, if not into the millions. I'd guess it follows the general strength of an economy. The more money flowing though the economy, the more building construction we need. However, we all know that building construction has been effected along with all other business and is very week.



The property real estate industry is probably just as big as the property construction industry, and employs probably even more people, but I have trouble seeing how the property real estate part could lead us out of recession. Certainly stable prices are important, as property, especially resi is used as capital for small business owners to invest and expand into business. So I agree that property prices that aren't falling is important. But what good does it do the economy if prices are rising?

And I'm not picking on resi property here. What about farm land prices for an example that I'm more familiar with. Same thing. I can't see that it would be good for an economy if farm land suddenly doubled in price. The net return of the land would stay the same, but it wouldn't be any more productive. Probably less productive, as an owner has more capital tied up. Any property the same. I don't see how increasing property prices benefits the economy.

What difference would it make to the economy if a 40 year old red brick red tile roof house in Sydney worth a million dollars, suddenly is worth 1.25 million if there was a resi property boom starting right now? That house suddenly becomes a quarter of a million more expensive, so anyone buying the house to live in needs a quarter mill extra, and that money is then tied up doing nothing more than puting a roof over ones head when it could be put to more useful purposes.



Righto. I reckon the real estate part of the property industry is a service. A very important service, but a service non the less. How does a property boom that increases prices, but not construction, like we are having now benefit the productivness of an economy? How would increasing prices lead us out of a recession..?? I can't see how, but maybe I'm missing something important.


See ya's.

 

[BayView]

I agree TC.

And I think you need to add "business" investment into that scenario.

Currently we have both construction and businesses getting very little joy from the Banks.

Basically; no - or little - growth.

Property prices can go up all they like, but if wages and jobs don't increase there will be fewer around with some play money to buy them.