There has been a lot of talk about central bank intervention in the housing market, but the noises from the Reserve Bank itself have not suggested anything of that nature to me.
Indeed, the RBA appears to be remarkably sanguine on housing.
The latest Statement on Monetary Policy did reveal some shifts in stance, particularly around the resources sector. Let’s take a run through a few highlights…
The entire SOMP sits against a backdrop of a forthcoming major decline in mining investment – the effects of which look set to be pervasive – as well as a recent decline in bulk commodity prices.
Futures markets are increasingly toying with the notion of a further interest rate cut in this cycle.
In terms of housing market the Reserve Bank’s tone was restrained, noting that prices were relatively strong in Sydney and Melbourne, but have levelled out in Perth and Adelaide.
The RBA also went to some lengths to highlight that national housing price growth was slower in Q1 2014 than it was in Q4 2013 as well as moderate housing market sentiment surveys, thereby implicitly suggesting a lack of need for the deployment of macro-prudential tools.
The level of building approvals have softened but still remain at a level commensurate with further growth in dwelling investment and construction.
Dwelling construction increased by 5 percent over the March quarter to be 8 percent over the past year, while alts and adds are also now trending upwards again after a soft period.
Other indicators also suggest solid activity in the new housing sector, with loans for new dwellings in a strong uptrend over recent years and first homeowners grants for new dwellings up by another 22 percent in the past year to be nearly 60 percent higher since 2011.
This directly contradicts reports of “record low” numbers of first homebuyers and the data coming out of states with no grants appears very questionable.
There remains strong demand for new apartments from foreign buyers but this is mainly focused on the major metropolises and particularly their inner city locations.
The rental market shows that as construction picks up rental vacancies should trend back up towards their 25 year average and rental growth has eased back towards the 3 percent range, although it is generally stronger than that in Sydney.
Population and labour
Mining investment intention surveys and actuals suggest that the mining construction boom is now past its peak and investment will now begin to decline sharply over the next two years.
Much of the aggregate employment growth since the beginning of the year has been driven by New South Wales and Queensland.
Population growth is flowing towards the “stronger performing states”, particularly to the major capitals of Sydney and Melbourne as we expected, while growth rates will now recede in the mining intensive states, Queensland and Western Australia.
South Australia and Tasmania have higher rates of unemployment – population growth rates are and will remain soft in these southern locations.
The RBA specifically pointed out its concerns with the subdued labour markets in South Australia and Tasmania.
The labour force data is generally soft and there is plenty of inherent slack in the employment sector. Wages growth is consequently soft and inflation expectations are easing back in sympathy.
It looks to be unlikely that we will see interest rates moving upwards any time soon based upon the RBA’s tone and outlook.
GDP growth at the end of Q1 2014 was tracking at a year-om-year pace of 3.5 percent after a cracking 1.1 percent print in the first quarter. However, that result was driven overwhelmingly by net exports and the print for Q2 looks as though it could be flat.
The Reserve Bank sees GDP growth easing back towards 2 percent in 2015 before rebounding upwards towards its longer term average.