It’s been an interesting month full of economic news.
Recently the latest US inflation figures spooked the markets as there was no sign that underlying inflation is abating.
Then back home, Reserve Bank Governor Philip Lowe warned that a deteriorating global economy would make it hard for Australia to achieve a “soft landing” due to the economic buffeting that is underway.
He is also worried that businesses are using inflation as a cover for even higher prices. And speaking of the property markets, he explained he would not be surprised if house prices fall 10 per cent from their peak.
He also said the RBA wasn’t to blame for housing affordability issues - blaming the choices made by society.
There’s a lot to unpack from Governor Lowes’ speech so in today’s show Dr Andrew Wilson and I discuss this plus lots more.
The outlook for house prices and shares worsened over the last few weeks as interest rate expectations rose on the back of economic data showing inflation expectations will be harder to budge in Australia and the US and considering the Reserve Bank Governor Philip Lowe indicating that the bank will keep raising rates because they’re probably not at a neutral level yet.
RBA Governor Lowe’s appearance before the House economics committee very clearly communicated the view of the RBA that more interest rate rises are needed in the months ahead.
The Governor noted that 2.35% was on the low side for the range the Bank would consider ‘normal’.
By the end of last week, the money market had priced in a 72 per cent chance of another 50 basis point lift in the official cash rate to 2.85 per cent in October and a “terminal rate” of 3.95 per cent in mid-2023.
This was a significant shift from a week ago when the market saw only a 5 per cent chance of a 50bp hike next month and a 3.62 per cent terminal rate.
You’ll hear in my discussion with Andrew Wilson that in his speech to the Reserve Bank House of Representatives Standing Committee where Governor Philip Lowe said:
- He wouldn’t be surprised if house prices came down by 10 per cent as higher interest rates bite.
- He also said the RBA was not to blame for housing affordability issues
- Inflation should come back down towards 4 per cent by the close of 2023, after peaking at close to 8 per cent later this year.
- The RBA feels the current cash rate is too low, and there will be a few further interest rate rises.
Regarding high house prices, Dr. Lowe said:
- “The fact that Australians have to pay high prices for housing isn’t about (interest rates) over a long period of time. “
- “It's the choices we’ve made as a society that have given us high housing prices,”
- “And the high housing prices come not from the high cost of construction, they come from the high cost of land embedded in each of our dwellings,” he says.
- “And why do we have a high cost of land? Because of the choices we have made about taxation, the choices we’ve made about zoning and urban design.
- “The fact that most of us have chosen to live in fantastic cities on the coast.
- “And that we want a block of land.
- “We don’t want to live in high density, and we’ve chosen as a society to underinvest in transport.
- “So, all of those things have either reduced the supply of well-located land and so we have high land prices embedded which give us high housing prices. Interest rates have influenced the cycle, but not structurally.”
When saying he wouldn’t be surprised if Australian house prices fall by an average of 10 per cent.
Dr. Lowe has said he thought house prices could fall but it was unlikely they would return to pre-pandemic levels given how much they surged over the past two years.
- Policy was forced to move so far away from neutral during Covid and the required rapid move back to neutral means that “treacherous lags” have built up in the system complicating the calibrating of the impact of policy on demand.
- The household sector has accumulated around $275 billion in “excess” savings during the pandemic raising the risk that activity will be more resistant to policy tightening than in other cycles.
- Due to the collapse in net migration during Covid and the pent-up demand following the reopening, labour markets are uncharacteristically tight at this stage of the tightening cycle.
Given that the objective of the RBA is to “short circuit” the inflationary animal spirits, it’s clear there will be further rate rises.
While the best policy would be to slow the pace of tightening back to 25 basis point increments and allow time for an assessment of the various forces it will be interesting to see what the RBA does.
You’ll also hear Dr Wilson and I discuss the first rise in the jobless rate in 10 months has complicated the outlook for the Reserve Bank, as the central bank balances a desire to ease the pace of tightening to avoid inflicting a hard landing against global forces pushing rates higher.
Last week’s labour market data, unsurprisingly, remained consistent with a continuing very tight labour market.
Broadly, the data almost exactly reversed last month’s changes: the unemployment rate rose 0.1 percentage points to 3.5% (previously 3.4%), employment rose 34,000 (after falling 42,000 in July), and hours worked exactly reversed a 0.8% decline in July.
Full-time employment jumped by 58,800 in August, offsetting a drop of 25,300 in part-time employment, the statistics office said.
The number of unemployed people increased by 14,000 in August but is 21 per cent lower than the same time last year.
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“That’s why I believe currently there’s a window of opportunity for people who have cashed up, who’ve got the good job, whose finances are right, and who have a long-term view.” –Michael Yardney
“What I also found interesting was that full-time employment jumped by close to 16,000 jobs, and there were fewer part-time jobs, so people are working longer hours, and it seems that people taking time off for COVID and illness is decreasing as well.” –Michael Yardney
“Nothing is as dreadful as living a life of regret.” –Michael Yardney
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