RBA keeps rates on hold, mentions rising house prices

[Ausprop]

well with construction it's not only a matter of no growth, it's a retreat. the impact has to be on jobs and the economy

 

[boz]

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.

I guess if 1.25 mil suddenly is worth like 1 mil it is not that bad for the economy the rise on property prices or farmland prices. I am pretty sure this scenario of higher inflation is not going to happen with a stable/strong AU$ and rising unemployment. So I agree with TC that a rise in property prices would be no good for the economy

 

[topcropper]

I guess if 1.25 mil suddenly is worth like 1 mil it is not that bad for the economy .

Certainly. Falling property prices would be bad. You just have to look at the US or Britain to see that.

But I did say that in my post,......

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. .

See ya's.

 

[keithj]

WMI Consumer Sentiment for July was released today.

Surprise surge in Consumer Sentiment

The Westpac Melbourne Institute Consumer Sentiment Index increased by 9.3% in July from 100.1 in June to 109.4 in July.
...
This is unquestionably a stunning result.
...
This is now the highest level of the Index since December 2007. It is 38.5% above its level a year ago and at 109.4 optimists decisively out-number pessimists for the first time since December 2007.
...
The lift in Confidence appears to have spread to the housing market. In May we added a special question to the Survey asking households about their expectations for house prices. In May, only 32% of respondents expected house prices to rise over the next 12 months. In the July survey that proportion has increased to 52%. And the rise has not been due to over exuberant First Home Buyers. Respondents in the 35-54 age bracket have increased their confidence levels from 28% to 53%.
...

 

[MichaelW]

Keith,

Wow, that's huge news. I knew sentiment was now positive with optimists outnumbering pesimists, but I didn't know that last little bit about outlook for house price direction. With the majority of 35-54 year olds now expecting house price rises you can anticipate ongoing support for the market and a bit of a self-fulfilling prophecy!

Thanks,
Michael

 

[boz]

I can never work out a good trading opportunity with sentiment.
when sentiment is high you get the best selling opportunity as sentiment would have big room to go lower, but then when it is high it can stay high or go higher for quite a while. Same thing when sentiment is low (can go lower or stay low). A bit like the RSI or CCI on techincal analyisis.
One thing is for sure that in the long term sentiment play no role (I wouldn't buy a house looking at consumer sentiment).

 

[WinstonWolfe]

Does Westpac bank base their LVRs on consumer sentiment?

 

[keithj]

I can never work out a good trading opportunity with sentiment.

I'd agree. However, it's another small piece in the jigsaw, that helps determine where the economic cycle is going next.... and when.

 

[Gools]

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.

TC, what about the vendor that just got an extra $250k for their property? In some* instances wouldn't that release more spending money into the economy? I think you might have been looking at it from only one side (that of the purchaser).

Gools

*-Investors selling down, older people down sizing or moving to cheaper non-cbd areas.

 

[oracle]

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

I reckon we could not get out of this recession unless US gets out of their recession.

I think monitoring where the share market heads in the next few months could be essential to where the property market would head.

I believe it's the share market that would show indicators of when we could start seeing growth in the economy which would certainly flow through to the property market.

Just my 2 cents.

Cheers,
Oracle.

 

[topcropper]

TC, what about the vendor that just got an extra $250k for their property? In some* instances wouldn't that release more spending money into the economy? I think you might have been looking at it from only one side (that of the purchaser).

.

Yeah, true. It would. I was only looking from one side.

See ya's.

 

[WinstonWolfe]

I'd like to see the correlation or predictive power of consumer sentiment for house sales volumes because this chart doesn't make it look strong at all.

 

[gwk]

I'll tell you in 3 years

Basically what that chart has done has smoothed out any shorter term indications of a sentiment change, meaning only a longer term trend will be obvious. By the time it is viewable it has changed, it will be many months on from that change, i.e. too late.

As you say, in the early 2000's you got massive sales volumes, and have only a gradual rise in sentiment, and in 2005 you had sales rising, yet sentiment falling? so unfortunately that chart doesn't really tell anybody too much other than it's a nice 'hindsight' viewer.

 

[keithj]

Westpac has long held one of the more bearish cash rate forecasts, expecting a further 100bps of cuts to 2%. Last month they upped their forecast to a low of 2.5%. This week they changed again to expect no more cuts - No more rate cuts by the RBA, but prolonged delay before rates rise.

The events of this week have persuaded us that the prospects for further rate cuts in Australia have diminished to the point where we have revised our forecasts to eliminate rate cuts from our view. We now expect that rates have bottomed out and expect that the next move by the RBA will be to increase rates although we do not expect that move until early in 2011.

....

The events of the last week that motivated this change of view have been:
1) The 9.3% surge in Consumer Sentiment to 109.4. That followed a 12.7% jump in June....

2) The evidence that the interest rate cuts are working was further emphasised in the housing finance data released for May. The number of loans to Owner Occupiers grew in annual terms by 23.5% up from 13% in April.
...
Of more crucial importance to us were the reactions of those in the 35–54 age bracket .... the broadening of the housing recovery from FHB's to upgraders and investors is much more likely if these groups are confident about house prices. Scepticism about the sustainability of the housing surge given the inevitable withdrawal of FHB's has been largely allayed with the recent strengthening of finance approvals and the sharp increase in confidence about prices in the 35-54 age group.

...

3) The Governor's Statement following the Reserve Bank's Board meeting showed a significant increase in the Bank's optimism relative to the June Board meeting. On the global economy the Bank noted that "Downside risks to the outlook have diminished"......

...

4) The employment data was in line with our expectations. However we recently lowered our target peak in the unemployment rate to around 8% in late 2010 from about 9% in early 2011....

.....


With our new expected low point of 3% in the RBA cash rate we continue to expect that the first upward move will not be until early in 2011.

Other economists are also increasing their forecast for the low point in the cash rate, mentioning the risk of overstimulation.

In fact, given the current momentum in housing, there is even some risk of overstimulating that sector.

The chart below shows that the recent increase in sentiment towards housing correlates well to the number of finance approvals. And presumably approvals correlates well to sales volume. Whether the expected increase in volumes translates to an sustainable increase in house prices is the next question.

Regarding the next increase in the cash rate, economists and the bond markets put it anywhere from early 2010 till early 2011. And most seem to think that the rises will be steep - up to 250bps over 12 months. This is in contrast with the last up cycle, which was v. shallow over several years.

 

[chilliaa]

Basically i take from this that the RBA is 'reasonably' happy where interest rates are at the moment. They are low enough to continue to support the economy during this difficult period. The RBA is also seeing these grass roots future predictions and wants to bide time to see how they play out.

Also by leaving rates at 3%, the RBA is keeping some ammunition in case we go into a double dip. The RBA is not going to give up this ammunition quickly (or shoot it early).