Headline: Cash rate unchanged at 4.5%

Bang in line with the overwhelming consensus, the cash rate was left unchanged at 4.5%.

The Bank remains positive on the global outlook, but far less upbeat than recent pronouncements. Indeed, only in the Asian and Latin American region is growth strong, with China “now starting to moderate to a more sustainable rate”, thereby reducing the chance of the boom/bust scenario. As for the rest of the global economy, the risk is perceived to be skewed on the downside. The outlook for Europe is clouded “given the budgetary constraints”, while “US growth has looked stronger in the first half of 2010 but the pace of labour market improvement is slow”.

On the domestic front, the Bank views the resources boom to be sufficient to compensate for the ending of the various fiscal stimuli, with the economy expected to grow around its trend rate. However, the underlying rate of inflation was still “likely to be in the upper half of the target zone over the next year”. Unusually, for recent statements, there was no commentary from the Bank regarding either house prices or volumes.

Clearly, it is the downside risks to global growth which is holding back the bank from raising domestic rates. Indeed, the market was pricing in a small chance of a rate cut this month. Ultimately, however, it will be the performance of the domestic economy which will ultimately determine the level of domestic rates, both absolutely and relative to the rest of the world. Even though the timing (and extent) of the next rate move is less certain, given the global externalities and the increasing likelihood of a Federal election campaign, a further rate increase still seems the most likely outcome.

Building Approvals (May sadj) -6.6% mom, 26.6% yoy

Main Points

1.       Consensus expectation was for no change to approvals in May.

2.       House approvals rose 1.7% during the month and are 9.2% higher than a year earlier.

3.       Non-house approvals (apartments) fell 18.8% in May and are 86.1% higher than a year earlier.

Property Insights

Last month (April) dwelling approval saw a large drop in approvals for houses. This month apartment approvals declined sharply (by nearly 20%), while house approvals rose marginally (1.7%). Consequently, overall dwelling approvals, which declined by over 10% in April, fell a further 6.6% in May.

Clearly captured in the softening of housing finance, the ending of the first home owners boost and higher interest rates is having the expected effect of crimping housing demand. Even so, the upturn in dwelling construction to date has been weaker than suggested by dwelling approvals. It is both too early and too difficult to gauge how much dwelling construction has been held back due to resources being diverted to the Government’s $16 bn schools (and university) spending program. However, now this is being run down, the level of underlying dwelling construction should become more apparent.

Even though dwelling approvals have probably reached their cyclical peak, conditions remains favourable. Population growth remains rapid and, despite political pronouncements to the contrary , is likely to remain so. By comparison, residential construction has been weak for a number of years, giving rise to a significant shortfall. In addition, the supply-side measures introduced in NSW Budget should boost housing construction output in this (historically underperforming) state.

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Housing Finance (value April) 1.6% mom, -2.9% yoy.

Main Points:

1.       Owner occupier finance rose 1.9% in April; down 17.2% yoy.

2.       Investor finance increased by 1.3% during April, up 26% yoy.

3.       The volume of owner occupier loans fell 1.8% in April, down 25.3% on a year earlier.

4.       The annual growth in loan size increased for both first home and repeat buyers.

5.       The share of first home buyers nudged up from 25.9% to 16.3%.

6.       Investors account for 43% of housing finance, virtually unchanged from March.

7.       Commitments for construction of new dwellings dropped by 4.8% while for the purchase of new dwellings increased by 6.3%.

Property Insights

The headline message is clearly the decline in the number of loans. These have now fallen for the past seven months and are 25% down on a year earlier. However, the composition of finance (by value) shows a significant divergence between owner-occupier and investor demand.

Finance demand by owner occupiers rose (by 1.9%) in April. This was the first rise in seven months and was due exclusively to a  (2.9%) jump in finance for established properties. Even so, total owner occupier finance is 17.2% lower than a year earlier.

Owner occupier demand for new properties continues to dwindle, falling for the sixth consecutive month, to be 6.7% lower than a year earlier.

While owner occupier demand has fallen away, so investor demand has picked up, rising for eight of the past nine months. However, the improvement in investor demand has extensively been for established, rather than new housing.  Placed in perspective, investor finance for new dwellings is 6.7% lower than a year earlier, while for established dwellings it is some 25.8% higher.

So, while investor demand has compensated for the falloff in owner occupier demand, this has pronominally been for established (rather than new) dwellings. Consequently, finance commitments for construction of new dwellings fell by 4.8% in April.

Irrespective of the fall away finance demand, the loan size taken out by both first home and repeat buyers increased in April (by 1.8% and 2% respectively). Consequently, the annual rate of increase of loan size for repeat buyers is 10.3% higher than a year earlier, and 2% higher for first home buyers. This helps to account for the stickiness of property prices, particularly for established properties.

The composition of housing finance shows the supply response is easing, while the strength of demand, particularly for established properties, is keeping the pressure on property prices. Even though the rate of house price inflation looks set to ease, the significant housing shortfall and strong underlying demand will continue to place a floor under property price inflation.

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Headline: NSW Budget – A Boost to Supply

1.      For the next two years from July 1:

a.       Stamp duty cut to zero for those buying a home or apartment worth under $600,000 off the plan, thereby saving $22,490.

b.      For a new home already under construction, or newly completed, and worth up to $600,000 duty cut of 25%, thereby saving $5623.

c.       To assist/encourage downsizing by retirees, no stamp duty will be payable for the over 65s who buys a newly built home worth up to $600,000.

2.      A cut in the payroll tax from 5.65% to 5.5% cent, brought forward to July 1 2010 from January 2011. A further cut to 5.45% will be implemented from January 1 in 2011.

3.      Economic growth in 2009-10 is estimated to be 2½%, with employment increasing by 1%.

4.       Economic growth in 2010-11 and 2011-12 is forecast to increase further to 3 and 3½ per cent respectively.

Year average per cent change, unless otherwise indicated

(a)    Year average, per cent

(b)    Per cent change through-the-year to June quarter

The NSW Treasury are forecasting national and NSW output increasing at an above-trend rate in both 2010-11 and 2011-12.  Indeed, while NSW “is expected to grow strongly, resource-based states may grow even more rapidly”.  Clearly, such an outcome would imply a tightening in economic policy to ensure economic activity does not grow beyond its productive potential.

The NSW Treasury is forecasting dwelling investment growing strongly in 2010-11, with the recovery is expected to continue in 2011-12.  The factors supporting housing demand include low rental vacancy rates, rising rents, strong population growth and low unemployment.  Additionally, “a recovery in multi-unit dwellings which was delayed due to past tight credit conditions for financing of property developments”.

Property Insights

Even though there are signs of the cyclical demand for housing starting to ease, the underlying fundamentals underpinning the NSW housing market remain compelling; the rapid rate of population growth and historical undersupply. Furthermore, the fiscal measures, introduced in the State Budget, are aimed at boosting the demand for new housing. These cyclical and structural demand forces, in conjunction with the announced cap on the amount councils can charge developers on new developments to $20,000, should lead to a meaningful boost to supply. Just as importantly, the Budget measures are directed towards boosting housing supply, rather than demand, and hence prices.

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The RBA Board decided to leave the cash rate unchanged at 4.5 per cent.

Following three consecutive monthly increases of 25 basis points, the RBA board, and clearly influenced by events emanating from the PIIGS (Portugal, Ireland, Italy, Greece and Spain), the RBA decided to leave rates on hold.

However, from the tone of the text from the RBA, this is likely to be a temporary measure.  The high level of the terms of trade means “output growth over the year ahead is likely to be about trend” , while “Inflation appears likely to be in the upper half of the target zone over the next year”. Furthermore, while there has been a “significant adjustment from the very expansionary settings reached a year ago… the Board views this setting of monetary policy as appropriate for the near term.

From this, it would seem, all the while there is (downside) uncertainty attached to the European economies and equity markets are under significant pressure, rates are on hold.

Clearly, should the proposed mining super profit tax crimp mining investment (and, consequently, the growth dichotomy between the resource rich and resource starved states) the pressure on rate increases will be alleviated.

Headline: Building Approvals (Apr) -14.8% mom, 21.3% yoy

Main Points:

1.       Consensus expectation was for a modest decline of 5% in April.

2.       House approvals declined 13.5% in April; up 4.7% compared to a year earlier.

3.       Other dwellings (apartments) declined 5.4% during April, but remain 42.3% higher than a year earlier.

4.       Declines in house approvals posted in all the major states during April; Victoria -23.8%, NSW -9.4%, Queensland -6.6%, WA -2.5%.

Property Insights

Last month’s jump in approvals, by 1886, (extensively apartments) is increasingly looking like a blip on the property radar screen. Total approvals have now declined in three of the past four months to be 807 dwellings lower. Stripping out the lumpier approvals for apartments, house approvals are now only 4.5% higher than a year earlier. Clearly higher interest rates, let alone the winding back of the first home owners’ boost is having an impact.

Even allowing for the monthly blips, the trend among the states shows a significant weakening. House approvals are down by 0.6% since the start of the year in WA, down by 6.2% in Queensland, down 11.2% in NSW and down by 22.1% in, the previously resilient, Victoria.

Furthermore, the gap between housing finance for construction and dwelling approvals has virtually closed,  suggesting the peak in approvals is very close at hand, if it hasn’t already passed. This creates a conundrum, in that while the demand for accommodation is starting to slip, taking the pressure off of property prices, dwelling supply is also moderating.

However, the lag between approvals and construction suggests dwelling starts should exceed 170,000 for 2010. While this is a significant uplift on 2009 housing starts, the rapid rate of population growth, should ensure the housing shortfall will increase further.

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Headline: Employment (April saj) up 33,700

Main Points:

1.       Full-time employment increased 37,500 while part-time employment decreased 3,900.

2.       Unemployment rate remained at 5.4%.

3.       Male unemployment rate decreased 0.1 pt to 5.3% while the female unemployment rate increased 0.2 pts to 5.5%.

4.       Participation rate at 65.2%

The labour market tightened further during April, with the 34,000 added in April meaning total employment has increased by over 110,000 since the start of the year. The improvement in the labour market in April was confined to full-time employment (up 37,500), while part-time employment continued to moderate (down 3,900).

Property Insights

Short-term, forward-looking, indicators suggest the labour market looks set to strengthen further. Job ads growth remains strong, corporate profitability is improving while the NAB business survey is at historically high levels. Anecdotal evidence also points to pockets of labour shortages starting to emerge in the resource industries/states.

Consequently, with the likelihood of the labour market being tighter than “neutral” the risk to increased wage pressures raises the spectre of interest having to rise in excess of their historical average. Additionally, the need to satisfy the labour requirements of the resource companies, while also providing some slack in the labour market, means the population (immigration) will need to growth at a strong pace. This, in turn, will ensure the demand for accommodation remains strong in the foreseeable future. Needless to say, unless there is a compensating supply-side response, the upwards pressure on property prices is likely to remain.

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Headline: Housing Finance – ex. refinancing (March) down 1.7%, -5.1% yoy

Main Points:

1.       The share of first home buyers (of owner occupiers) fell to 16.1%, from 18.1% in February.

2.       Owner occupier housing finance fell 4.5% in March and is 17.6% lower than a year earlier.

3.       Investor finance rose 3% during March to be 24% higher than a year earlier.

4.       Investor finance now accounts for 39.2% the total, up from 37.4% previously.

5.       Accordingly, owner occupier housing finance fell to 60.8%, from 62.6% previously.

Property Insights

The values of housing finance registered its sixth straight monthly decline, as demand continued to moderate in reaction to the twin pincers of rising interest rates and the ending of the first home owner’s boost. The total value of housing finance is now 5.1% lower than a year earlier. Owner occupier finance led the decline, falling by 4.5% in March; the sixth monthly decline and some 17.6% down on a year earlier. The first home buyer share of owner-occupier loans fell to 16.1% in March (from 18.1% in February), the lowest share since August 2006, as the first home buyer boost faded.

Reflective of the softening in demand by first home buyers, the size of loans is now lower than a year earlier. However, the average loan size taken out by repeat buyers continues to rise in excess of 9% at an annual rate, suggesting price buoyancy in the two tiered property market still exists.

Lower mortgage demand by first home buyers means greater demand for rental accommodation. In conjunction with capital appreciation, investor demand continues to strengthen. After declining by (a revised) 0.8% in February, investor demand rebounded by 3% in March to be 24% higher than March last year. The share of housing finance by investors (at 39.2%) is now at its highest level since August 2008.

Overall, housing finance continues to exhibit a fading momentum and, with the likelihood of a further deterioration in housing affordability and rising interest rates, a trend that look likely to continue. Furthermore finance for new construction continues to trend lower, suggesting the future construction profile is likely to be a soft one.

This creates a dilemma for monetary policy. Higher interest rates are serving to crimp demand and hence the pressure on property prices. Simultaneously, higher interest rates are impacting on dwelling supply which, against a backdrop of rapid population growth and dwelling undersupply, is putting upwards pressure on prices.  Clearly, to avert price pressures, policy measures independent of monetary policy are required to boost dwelling supply.

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Headline: Retail turnover (March) up 0.3% mom, 1.2% yoy.

Main Points:

1.       Consensus expectation was for a stronger rise during the month of 0.7%.

2.       Sales increased (sadj) for Clothing, Footwear & Other Personal Accessory Retailing (1.4%), Department Stores (1.1%), Other Retailing (0.9%), Cafes, Restaurants & Takeaway Food Services (0.7%) and Food Retailing (0.3%).

3.       Sales declined (sadj) for Household Goods Retailing (-1.0%).

4.       Among the states and territories, sales rose sharpest in the ACT (1.3%) in March, followed by NSW (1.2%), the Northern Territory (0.9%), South Australia (0.5%) and WA (0.4%).

5.       Sales fell in Tasmania (-1.0%), Queensland (-0.5%) and Victoria (-0.1%).

Insights

The ending of the Government’s cash handouts and a steady cranking up of interest rates has contributed to the buoyant retail turnover, which was apparent through the course of 2009, virtually evaporating. Excluding the anomaly created by the introduction of the GST (back in 2000), retail turnover is now growing at its slowest annual rate since June 1991. Clearly, part of this current weakness can attributed to base effects (sales rose 2.5% in March last year), but since last May retail turnover has effectively been flat.

In volume terms, that is, after allowing for inflation, retail turnover rose by only 0.1% in the March quarter.

The weakness of retail spending is however, somewhat perplexing. Notwithstanding the impact of recent events in Greece, the revival in equity markets and buoyancy of house prices means personal wealth has staged a significant recovery. Population and employment are still growing at a rapid pace and real incomes are ticking along. So, the consumer fundamentals are strong. Also, for what it is worth, consumer confidence is at near record highs – which demonstrates, yet again, confident consumers do not necessarily spend. On the basis the spending data is being correctly measured, this means consumers have become more cautious and started to increase their level of saving, or are diverting their income to larger ticket items; residential property.

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Headline: Dwelling Approvals (March) up 15.3% mom, 51.6% yoy.

Main Points:

1.       The rise in total dwelling units approved (of 15.3%) following falls in the previous two months.

2.       However, private sector houses approved rose only 0.5% following a fall last month.

3.       On the other hand, private sector other dwellings (apartments) approved rose 59.9% following falls in the previous two months.

4.       Private sector house approvals diverged significantly among the states during March; NSW (+14.9%), WA (-8.1%), Victoria (-3.3%) and Queensland (-0.7%)

Property Insights

The strength of overall building approvals is clearly flattered by the sharp bounce in apartment approvals (up 59.9%) in March following declines of 25.3% in January and 8.9% in February. More closely aligned to underlying supply, private sector house approvals rose a more modest 0.5%, virtually reversing the decline of 0.7% last month. Placed in perspective, in the first three months of the year private sector house approvals have risen by only 1.2%.

Among the states, the picture is very similar, house approvals are up by 2.5% in the first three months of the year in WA and Victoria, by 1.2% in Queensland and, despite the near 15% rise during the month, down 1.4% in NSW.

In spite of this softness, the earlier weakness means private sector house approvals are up by over 30% compared to a year earlier in all the major states. Furthermore, the past strength in housing finance, suggests approvals should remain solid in the near term.

Looking further out, the ending of the boost to the first home buyers grant and the increase in interest rates means that cyclical demand is starting to taper away. However, the solid underpinning of strong population growth, in conjunction with and a significant dwelling shortfall, will ensure strong underlying demand. So, unless the supply picks up, property price pressures are unlikely to abate quickly.

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