Cash Rate (May) raised  0.25 percentage points to 4.5%

The economy continues to grow faster than expected and because “Australia’s terms of trade are rising by more than earlier expected” it will “foster a build-up in investment in the resources sector”. Stronger investment in the resource states has two off-setting consequences if the economy is not to exceed its productive potential.

1.       The non-resource states will have to expand below their productive potential (or trend rate),

2.       The most interest rate sensitive sector of the economy – housing – will need to grow at a more moderate pace to accommodate the investment in the resources sector.

This much is inevitable.

Indeed, the Bank in its Minutes notes the softening of housing supply as “new loan approvals for housing have moderated … as interest rates have risen” , although “the market for established dwellings is still characterised by considerable buoyancy, with prices continuing to increase over recent months”.

Where the cash rate goes from here is an interesting question. The Bank continues to stress the “average cash rate”, as “the Board has been adjusting the cash rate towards levels that would be consistent with interest rates to borrowers being close to the average experience over the past decade or more. The Board expects that, as a result of today’s decision, rates for most borrowers will be around average levels”.

For rates to remain around their average levels assumes activity will grow around its average level. This is clearly a possibility. However, aided by the resources boom, the economy is growing strongly. House prices are rising at an annual rate of around 20%. Equity prices have recovered from their low and commodity prices are trending up.

This heady cocktail points to above average growth, biased towards the resource states. It also raises the likelihood of rates rising above their historical average and, consequently, a further moderation in dwelling supply. Against a backdrop of rapid population growth and significant undersupply, the property price pressures the Bank refers to are unlikely to abate quickly.

The resource boom, currently unfolding in WA and Queensland, is keeping the pressure on cash rates.

Headline: RBA Minutes 6^th April

The minutes reveal that when the RBA decided to raise rates by 25 basis points in April, they also laid open the possibility of even higher rates; sooner rather than later. The major consideration weighing on policy was/remains the rapid unfolding of the mining/LNG boom and the impact this is having on commodity prices and, consequently, the terms of trade.  The RBA minutes note “developments in commodity markets meant that the increase in the terms of trade through 2010 was likely to be substantially larger than forecast in the February Statement on Monetary Policy.  This implied strong growth in nominal incomes in the Australian economy over 2010.”

The minutes state the Bank expects economic growth in 2010 to be “around trend” and inflation close to its long term objective of “about 2½%”. This would imply “the level of interest rates in the economy would be expected to be close to average”. However, “since lending rates were still a little below average, members expected that they would probably need to rise further in the period ahead”.

So, unsurprisingly, interest rates are increasing in line with the RBA’s projected growth, with the ultimate objective of achieving sustainable stable economic activity. Whilst it would be presumptuous to assume a continuous error process, the RBA (along with other forecasting organisations) have consistently underestimated the size and impact of the resource boom and the underlying resilience of the economy during the economic downturn. Economic activity continues to exceed expectations. It follows, the more the resource boom surprises on the upside, so the more rates will need to rise and the more housing (volumes) will need to moderate.

Property Insights

The housing market continues to perplex the Bank, with the members discussing “factors contributing to the recent strong [property] price growth”. Demand, they note, is plentiful as “population growth was strong, households had confidence about future income growth, and mortgage rates were at below-average levels”. Simultaneously, “the supply of new housing was not expanding sufficiently, partly because of the land usage policies of local and state governments and also because of the tightness of finance for developers” However, the Bank is of the view property prices will moderate as “the current price growth was somewhat at odds with the falls in housing loan approvals over recent months.”

Whilst some price moderation is likely in the short term, higher interest rates will crimp supply as well as demand and, with buoyant population growth, the demand for accommodation will remain strong. This will serve to keep the pressure on both property prices and rents.

Even though there are signs of demand easing, so is dwelling supply.

Headline: Dwelling Finance (Feb saj) -3.7% mom, 3.5% yoy.

Main Points

1.    The market expectation was for a decline of 1% against an outcome of a 3.7% fall.

2.    The number of first home buyer commitments as a percentage of total owner occupied housing finance commitments decreased to 18.1% from 20.5% in January.

3.    Owner occupier finance declined by 5.1% in February, to be 6.4% lower than a year earlier.

4.    Investor finance declined by 1.1% during the month; 26.2% higher than a year earlier.

Property Insights

The ending of the boost to the first home buyers grant and higher interest rates have brought about the inevitable paring back in dwelling finance; declining for the fifth consecutive month. February was also the fifth consecutive monthly decline in owner occupier dwelling finance, meaning that is now lower than a year earlier for the first time since January 2009.

First home buyer interest continues to tumble and past experience would certainly suggest, having brought forward future demand, the paring back of the first home owner’s boost will lead to still further weakness in this segment of the market.

Investor finance also declined (the first time in five months), thereby alleviating some of the concerns which the RBA had recently raised about speculative property purchasing in the expectation of capital gains.

There are some indications of property price pressures softening at the margin, with the size of loans taken out by repeat buyers down marginally in February; to 11.1% year on year, from 14.3% in January. However, signs of a cooling in the property market are tempered by the continuing high mortgage clearance rate.

Although there are indications of an easing back in dwelling demand, finance for dwelling construction and new homes has also moderated, which means softer dwelling construction further down the track. When this is added to  the significant and growing level of housing shortfall it is clear housing demand will still be in excess of supply. Consequently, while price pressure may ease in the short term, without a significant increase in dwelling supply it difficult to envisage property price weakness.

Visit the Property Insights website.

The RBA raises rates again, but property price pressures remain.

Headline: RBA increases its cash rate by 25 basis points to 4.25%

The Reserve Bank increased its benchmark interest rate for the fifth time in six meetings, dismissing concerns earlier rate rises were starting to crimp consumer spending. The increase comes irrespective of a slowing in retail turnover and housing approvals. The continuing pressure on house prices remains a concern, with RBA Governor Stevens stating last week that house prices were “getting too high,” signaling that increased housing demand had not brought forth sufficient supply, as property price pressures were intensifying. The Governor’s statement today reiterates these concerns as “the market for established dwellings is still characterised by considerable buoyancy, with prices continuing to increase in the early part of 2010”.

In accordance with previous pronouncements “the Board judges that with growth likely to be around trend and inflation close to target over the coming year, it is appropriate for interest rates to be closer to average”.

The crucial (repeated) observation from the RBA are the implications of the resources boom, as  “Australia’s terms of trade are rising, adding to incomes and fostering a build-up in investment in the resources sector”, which will mean “output growth over the year ahead is likely to exceed that seen last year”. Put another way, if the resource states are expanding at a rate above the country’s productive potential, the non-resource states will need to grow below their productive potential.

Property Insights

The stronger the mining boom, the potential for which gets bigger by the day, the more interest rates need to be increased. Since housing is the most interest rate sensitive sector of the economy demand (and subsequently supply) for housing will eventually moderate.  The point is, the more rates need to rise (because of the mining boom), the greater the pressure on property prices, as supply diminishes. This is simply because the starting point is a significant undersupply of dwellings. So, it is far from clear edging up the official cash rate will serve to quell house price pressures all the while underlying demand remains buoyant.

Visit the Property Insights website.

Building approvals for February add weight to the notion housing supply is starting to moderate again. Against a backdrop of strong demand and an investment boom in resource states, the pressure on prices continues unabated.

Main Points

1.       Seasonally adjusted private sector houses approved fell 0.9% following rises in the previous two months.

2.       Seasonally adjusted estimate for private sector other dwellings approved (apartments) fell 10.9% in February and has fallen for two months.

3.       WA posted the largest increase, with house approvals up 5.4% in February, to be 53.7% higher than a year earlier.

4.       House approvals declined by 0.5% in Victoria (38.9% yoy), 0.7% in Queensland (41% yoy) and 10.4% in NSW (19% yoy).

5.       Retail trade, seasonally adjusted, decreased 1.4% in February. This follows a 1.1% increase in January and a 0.8% decrease in December 2009.

Property Insights

Under the strain of higher interest rates, both building approvals and retail turnover declined in February; thereby defying expectations of increases. Whilst the decline in underlying dwelling approvals (captured by house approvals) was a modest 0.9% in February, the regional composition shows an increasingly divergent performance between the resource and non-resource states.

The national decline in house approvals in February was weighed down by a 10.4% fall in NSW; the third consecutive monthly decline. At the other end of the spectrum, house approvals in WA have risen strongly for the past three consecutive months. The dichotomy between the resource and non-resource states is starting to re-emerge again and, with significant resource project planned for both WA and Queensland, it is a trend that looks set to continue.

Even though the peak in dwelling construction has probably not been reached, data for housing finance and dwelling approvals suggests it is close at hand; probably in the first half of the year in the case of the non-resource states.

Even though it is impossible to accurately pinpoint the size of the housing shortfall, it is generally agreed to be significant in NSW and, given the rate of population growth, steadily increasing. Meanwhile, dwelling supply in the state is showing signs of moderating, from an already low level by historical standards. The overall lack of supply, against a backdrop of buoyant demand is providing the catalyst for continuing property price pressure, further highlighted by RP Data. According to RP Data prices rose 1.4% in February, to be 12.7% higher than a year earlier. Of the capital cities, prices rose 3.8% in the three months to February in Sydney, 5.4% in Melbourne, 2.5% in Adelaide and 0.4% in Brisbane.

Irrespective of the weakness in retail turnover and dwelling approvals, interest rates are still heading higher. Quite simply, to accommodate the resources (investment) booms in WA and Queensland, other parts of the economy will have to grow at a slower pace. Higher interest rates are a pre-requisite to achieve this. Consequently, the most interest rate sensitive sector of the economy (house building) will moderate accordingly. Consequently, the greater the resource investment boom, the greater the pressure on property prices (as supply is pared back). So, while higher interest rates and the ending of the boost to first home buyers will crimp demand, price pressures will be sustained by a simultaneous slowing in supply, robust underlying demand and the starting point of an underlying dwelling shortfall.

Visit the Property Insights website.

An interesting article with a few key standout statistics:

• Over 200 million mobile subscribers in both Brazil and Russia by 2014
• 853 million subscribers in India by 2014
• 1.3 billion (yes billion) subscribers and 957 million mobile Internet users in China by 2014

The China stats highlight a key trend namely that mobile subscriber growth is slowing, but mobile Internet user growth is speeding up. The days of triple-digit subscriber growth are long past. And as subscriber bases solidify, it is now the mobile Internet user populations that are increasing rapidly, albeit from small bases.

Staggering as it may to conceptualise, there will be more mobile Internet users in China in 2010 than the entire population of the US.

Read more at eMarketer.

AUSTRALIANS have to work almost three times harder to pay off the average family home than they did 50 years ago.

Figures compiled by CommSec for The Sunday Telegraph reveal homebuyers on the average income now have to work for 19,374 hours to buy the average Australian house with the average mortgage.

Read the full article at news.com.au.

Whether it happens next month or not, interest rates have further upside, potentially more than the market is discounting. Furthermore, house price inflation remains an ongoing concern for the Reserve Bank.

The RBA Minutes (February)

The RBA continues to paint a very upbeat assessment of domestic economic conditions. Gone are concerns of the economic downturn or signs of an economic upswing. The RBA is of the view “growth might already have been running at or close to trend for a few months”. Furthermore, the mining sector is expected to provide a “significant boost to the Australian economy over a number of years”, which will ensure the non-resource states have to grow below trend. In addition to this, Philip Lowe (Assistant Governor – economic), at the UDIA national conference, added that the likely outlook for the Australian economy was for “growth over the next couple of years at, or above, average”.  Should such an outcome come to fruition, interest rates clearly have further upside.

The Bank also noted a softening in the demand for housing “consistent with what had occurred in previous episodes of monetary policy tightening”.  Furthermore, the uplift in supply had, given the economic conditions, been modest, since although “Building approvals … were running at a relatively high level compared with the past year”, it was at “a rate that was below the levels of previous peaks in home-building”.

Given this effective lack of supply response, the Bank, yet again, raised concerns about the upwards pressure on house prices, noting that, “while housing loan approvals had slowed a little, house prices had gained significant momentum and were continuing to rise strongly”.

In light of the  RBA’s explicit expectation of the economy operating in excess of its speed limit and the buoyancy of house prices, there is every chance the cash rate rises by more than the 80bp to 100bp which the market is currently discounting for the following 12 months. 

Visit the Property Insights website.

Signs are emerging of a softening in the demand for new housing.

Headline: Dwelling Finance ex. refinancing (January) -2.9% mom, 11.7% yoy

Main Points

1.  Owner occupier finance declined by 5% during January, reducing the annual growth rate to 6.7%, from 20.2% in December 2009.

2.  Investor finance rose 0.9% in January, to be 21.8% higher than a year earlier; up from 16.8% higher in December.

3.  Owner occupier finance in January accounted for 64% of the total housing finance, down from 65.4% in December and a peak of 69.8% in March last year.

4.  Investor finance, at 36%, is the highest share of total housing finance since November 2008.  

5.  The share of first home buyers (in owner occupier loans) fell to 20.5% in January, the lowest level since October 2008.

Property Insights

The confluence of rising interest rates and the ending of the boost to the first home owners grant have resulted in the fourth consecutive monthly decline in housing finance. Moreover, the fall in January was exclusively due to a decline in owner occupier finance (down 5% in January), which has now fallen for the fourth consecutive month. Since non-first home owner finance demand also declined in January, it is clearly not just the ending of the boost to the first home owner’s grant which is starting to crimp demand, but rising interest rates.

The fallback in first home owner demand in recent months has been significant, reflecting the impact of demand being brought forward. Since first home buyer demand has yet to reach pre-boost levels, a further easing seems inevitable.

Whilst owner occupier demand has moderated, so investor demand for finance has increased; rising in five of the last six months. Furthermore, since the demand for accommodation is solidly underpinned by strong population growth and a significant undersupply of dwellings, the ending of the first home owners boost and deteriorating housing affordability should generate greater demand for rental accommodation and hence further investor interest.

While construction finance is sharply down from its recent peak, a significant gap with housing approvals still exists. Consequently, it is unlikely dwelling approvals have peaked, although a softening in dwelling demand later in the year is becoming increasingly likely.  

The strength of population growth and the ever-increasing undersupply of accommodation means demand for accommodation will remain resilient. However, if this is to occur against the backdrop of a softening in dwelling supply, property prices and rental growth will continue to grow at a solid rate and housing affordability deteriorate further.

Visit the Property Insights website.

In case you haven’t noticed, CommBank is starting to nail its digital marketing. I’ve been impressed with Commonwealth Bank’s gradual efforts over the last year or more to ramp up its digital marketing.  Little wonder the company appears several times on the AIMIA Awards shortlist which sees the winners announced in Melbourne on Friday night. But CommBank’s digital work, mostly carried out by The White Agency, is starting to go way beyond banner ads and websites.

Read the full article at Mumbrella.