Why the RBA Should Have Left Interest Rates On Hold | John Edwards

The Cash Rate is now 2.25 per cent and at a historic low.

Personally, I was not on the side of a rate decrease as I did feel that the falling oil price and the lower Australian dollar was sufficient for stimulating demand in the Australian economy, and it was better to wait and see if these provided sufficient economic stimulus and keep “fuel” for future use if it is needed.

I did believe that there would be a rate cut in the last half of this year.

Before I discuss the implication for all in our housing markets of the rate cut I provide the Australia wide performance of our markets in Table 1.

Table 1: Market PerformanceThe most obvious issue to come out of the table is very mixed results across Australia.

The only city to be doing really well is Sydney, which has seen growth in the last 12 months of 16.78 per cent for houses and a lower 12.9 per cent for units. In fact some markets are going backwards and failing to keep pace with inflation.

Sydney has crossed another major milestone.

[sam id=53 codes=’true’]  The median value of a house is now $900,500, making it all but impossible for the median income family in Sydney to purchase the median property.

Affordability calculations indicate that it now takes about 56.9 per cent of the median family’s weekly income to meet their mortgage commitments and leaves them with a very small $734 per week to live on and pay for the necessities in life.

The reality is simply that Sydney is no longer an affordable place to buy and own a home if you are just starting out.

The growth in the Sydney market in dollar terms is in boom conditions.

The median value of a house is now $900,500 and in the last 12 months has provided an increase of $144,732.

Most would recognise the period ending December 1988 as a boom in house prices when the growth rate was 36.17 per cent.

The dollar value increase was $51,500. Even in today’s dollars (making an allowance for inflation) that figure is $93,922.66.

There has not been a tendency to call the current growth period a boom simply because the rate of growth has been relatively low (16.78 per cent) when compared to prior periods of high growth.

However, this lower growth is simply a function of the much higher cost of housing.

Given the above there can be no doubt that in the last 12 months we have in fact witnessed one of the largest boom periods in the history of Sydney’s housing market.

The boom conditions are usually caused by supply issues and greed. property investment boom

The latter comes about as a consequence of people believing there are low levels of risk and quality returns to be made by entering a market.

New South Wales, in economic terms, has been performing better than other states.

In fact, in the last 12 months growth in State Final Demand, when compared to the same period in the prior year, was 3.5 per cent.

This compares to, say, Western Australia which is arguably in recession, and has seen its State Final Demand fall in the last three reported quarters.

An understanding of that state’s position is illustrated in Graph 1.

Graph 1: Western Australia State Final Demand

So, on economic grounds there is a clear reason why people who are wanting to enter the housing market would choose New South Wales.

Looking a little deeper at this market we find some disturbing facts:

  • Commencements in new housing is increasing and is currently some 4,082 dwellings above the median commencement number of the last five years;
  • New housing approvals, while having turned down slightly, is still running at some 2,591 dwellings above the five year median;
  • Population growth as last reported by the ABS is slowing and currently is running at some 1,728 people below the five year median;
  • Residex estimates that there is currently some 7,000 dwellings surplus to need; and finally
  • Unemployment is increasing and is likely to increase a little more than was anticipated given the lower crude oil prices and a related reduction in the liquefied natural gas development and exploration area.

All of the above suggests we are heading into a significantly over supplied market which could lead to some significant corrections.

Many would suggest that the over supply position we calculate is unlikely to be correct and the ABS figures do not reflect current reality simply because they are not updated regularly enough by the ABS.

These points are somewhat valid as it is difficult to get a very accurate handle on current positions.

However, there is one metric that is a good indicator of how the supply position is in a market and that is the rate of change in dollar weekly rentals.

In a market where there is significant shortage of desired stock, dollar weekly rentals increase significantly.

If you look at Table 1, there is one aspect which stands out and that is the lack of growth in dollar weekly rentals.

The one market that has shown good dollar weekly rentals growth is the Sydney house and land market.

The unit market growth in rentals is significantly lower.

What is undoubtedly clear to all is that it is our unit market which is getting the majority of new housing stock.

From this we can conclude that there is probably a stock shortage in desired house and land and at least a balance in stock or over supply in unit dwellings.

Analysis we have done right across Australia indicates that potentially in all states there is a stock overhang and in many states it is significant.

So what does this all mean in a situation where interest rates have decreased?

We can anticipate that house prices will probably move forward from here, notwithstanding the fact that in all states the markets were slowing in rate of growth terms.

In short, the interest rate decrease is likely to stimulate the markets.

However, the lending control of the major banks is likely to ensure the market doesn’t overheat to any significant extent.

Is this a good outcome?

The simple answer is NO!

It is good for existing house owners in the short term but in the longer term it may very well not be.

In my period of 30 plus years of constantly monitoring house price growth, I have seen a number of growth periods.

Each period always ends in a certain number of people who buy close to the top of the market with excessive leverage getting “burned”.

I issue a warning to all:

We have passed the top of a normal growth period and we are about to have the market stimulated and have further growth.

That growth is taking us into uncharted waters where affordability will be potentially worse than we have previously seen.

Even with interest rates for home loans at 4.5 per cent convertible monthly, the median family in Sydney would only have $789 after tax and mortgage repayments to meet normal living expenses.

State Governments need to take care.

There will be pressure to maintain economic growth and a relatively easy way is to stimulate consumerism and dwelling development to provide jobs.

However, this approach can be short sighted.

What is really needed is the forethought to stimulate new industry which will produce long term national income.

Australia badly needs a cohesive political situation where we all look to the future prosperity of the nation and stop simply point scoring to gain power.

Control over our economy, where it is gained by negative point scoring, is of no use.

Governments need to gain control on the basis that the party gaining control has a plan that will structurally change the way we produce our national income and grow it so that we have the capacity to spend and improve the standard of living of future generations.

If you are an investor wanting to get into the market, take care, and make sure you don’t pay a premium for any purchase you make.

This is particularly the case where you are buying new units.



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John Edwards


John is Consulting Analyst for Onthehouse, Australia’s most comprehensive real estate portal, and Founder of Residex, a leading Australian research organisation providing quality information on the real estate market to government, financial institutions, valuers, real estate agents, accountants, solicitors and the general public. Visit www.OnTheHouse.com.au

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