This article first appeared on The Wire, the web page for FIIG, at this link: https://thewire.fiig.com.au/article/commentary/opinion/2018/11/19/rba-ignores-property-at-its-peril
RBA ignores property at its peril
The RBA rolls the dice on house prices
The usually careful and well considered Reserve Bank of Australia is taking a huge gamble on the Australian economy into 2019 and 2020.
The RBA is betting that the current slump in house prices and dwelling approvals are orderly and will not have any material or lasting consequences for the economy. In fact, RBA Governor Philip Lowe believes the fall in Australian house prices “is good news”, “manageable” and “a welcome development”. Further, in its November Statement on Monetary Policy, the RBA suggested that house prices “have continued to ease gradually”, which is a remarkably bland assessment given that close to $400bn has been wiped off the value of Australian houses since the price peak in September 2017.
Governor Lowe and the RBA’s open indifference to what is a major shift in the $7trn valuation of residential property is bold.
Wealth and household spending – The link
While some cooling in house prices was always inevitable following the price boom in the four years to 2017, the price falls are getting close to a point where the loss of household wealth will impact household spending. The RBA itself and a bevy of global academic research show a link between changes in household wealth and growth in household spending.
This article first appeared on the Business Insider web page at this link: https://www.businessinsider.com.au/labor-negative-gearing-impact-housing-comment-2018-11
How Labor’s plans to revamp negative gearing could put a floor on house prices and lower rents
The economic policy debate over Labor’s plans to overhaul the negative gearing rules is hotting up.
It is an important debate on a policy change that will have implications for the housing market, particularly for first home buyer and investor demand.
The government is claiming that the negative gearing change will “take a sledgehammer”, “smash” and “punish” everyone in Australia. Treasurer Josh Frydenberg says that under Labor, “your home will be worth less and renters will pay more.”
It is a frightening scenario for property obsessed Australians with the value of all dwellings in Australia estimated to be around $7 trillion.
But is it true? What are the facts about the current housing cycle and how will Labor’s plans to revamp negative gearing impact the housing market?
This article first appeared on the Yahoo 7 website at this link: https://au.finance.yahoo.com/news/heres-reserve-bank-needs-cut-rates-000642869.html
An RBA rate cut is not about housing – it’s about exports and investment
Many people misunderstand my concern about falling house prices and the coincident call for the Reserve Bank to cut official interest rates.
Any interest rate cut that the RBA may yet deliver should not, and certainly will not, be aimed directly at supporting house prices. On the contrary – future interest rate cuts should be directed at supporting the economy more generally at a time when the house price falls threaten to erode household wealth, consumer spending and the economy more generally.
The house price declines in the current downturn are much what I was forecasting a year ago. The issues surrounding the price falls are being compounded by the recent acceleration of the decline, the historic collapse in housing auction clearance rates, the escalation of the bank credit freeze and the on-going problems with low wages and inflation that are all creating an environment that will hit the economy into 2019.
While a recession in Australia is still unlikely, very unlikely in fact, there is a growing risk the unfolding mix of events will hit the economy hard.
The destruction in household wealth from the falls in house prices alone is now about $300 billion. Add to this another $100 billion of wealth destruction from the recent fall in the stock market, and a climate of severe weakness in consumer spending is front and centre in the outlook for most credible forecasters.
This article first appeared on the Yahoo7 Finance website at this link: https://au.finance.yahoo.com/news/important-energy-prices-big-picture-225353697.html
How important are energy prices in the big picture?
What does it say about the Australian economy when energy prices, or more particularly the price of electricity, is a dominant issue for the Prime Minister, his ministers and the government more generally.
Think about it – electricity prices!
Not unemployment, care for older Australians, low wages growth, climate change, housing affordability or even education and training. These are things that should be much higher up the list of things for a government to do than worrying about the price of running your fridge, lights and heater.
For consumers, about 2.3 per cent of household expenditure is on electricity, which equates to an average of about $35 a week. It is not a trivial amount but in context, it is not a huge impost.
Consumers spend about 50 per cent more on restaurant meals, some 300 per cent more on holidays and 40 per cent more on tobacco. They also spend about 60 per cent more on beer and wine than they do each week on electricity.
To be sure, the price of electricity has surged over the past decade or so which has been important for some, mainly low income, household budgets. And for some who spend more than the average amount of electricity, higher prices can have a slightly higher impact.
Since the start of 2009, retail electricity prices have risen 99 per cent. This is a big rise. This is well above the 28 per cent rise in wages over the same time.
But let’s look at price changes in a range of other items over that time.
The September quarter CPI confirmed annual underlying inflation easing back to 1.7 per cent, well away from the mid-point of the 2 to 3 per cent target range.
The result locked in fours years where inflation has been below the mid point of the range and two years where it has come in below the bottom of the target band.
For the RBA, this is a fail.
A fail not because of a temporary miss. The odd miss on inflation is inevitable and is fine. Shocks sometimes come along and there are periods where inflation spikes or drop temporarily.
But this is no temporary miss.
Doing nothing about two years of missing the target and then having a forecast profile that suggests there will be another couple of years where inflation remains below the mid-point of the target is a policy elitism that damages growth, employment and wages.
This article is from 29 August 2018 and first appeared on the Business Insider website at this link: https://www.businessinsider.com.au/making-the-rba-relevant-again-2018-8
The new Treasurer has a real shot at making the RBA relevant again - and it starts with cutting interest rates
It is not clear what new Treasurer Josh Frydenberg discussed with Reserve Bank Governor Phillip Lowe during their recent conversation, but one thing that should have been top of the agenda is a reworking of the Statement on the Conduct of Monetary Policy.
The appointment of a new Treasurer opens the door for this vitally important policy document on how the RBA undertakes its policy task to be updated and revamped.
In September 2016, when former Treasurer Scott Morrison and newly appointed Governor Lowe updated the framework in which the RBA would operate monetary policy, “financial stability” was included as an objective for policy. It is not clear why this would have been added to the RBA’s agenda when the existing 2 to 3 per cent inflation target had been working so well. Whatever the reason, the inclusion of “financial stability” has meant the RBA has downplayed, if not effectively abandoned its inflation target and this explains the ongoing sluggishness in the rate of growth, the still high level of labour market underutilsation and the associated record low wages growth which has been seen in the past year.
One of the first things Mr Frydenberg should do as Treasurer is revamp the Government’s conduct of monetary policy and exclude financial stability, which was never defined, and return the focus to the inflation target. Under the current arrangements, the RBA has missed its inflation target for the past three years and with its most recent forecasts, the mid point of the inflation target will not be hit until at least 2021.
This article first appeared on the Yahoo 7 Finance web site at this link: https://au.finance.yahoo.com/news/comes-house-prices-seems-cant-win-210644370.html?soc_src=social-sh&soc_trk=tw
When it comes to house prices, it seems you can’t win
Australians just love to complain about house prices, whether they are going up or down.
Some of those expressing concern about rising house prices a year ago are the same ones concerned about them falling now.
When it comes to house prices, it seems you can’t win.
Up until a year ago, there were regular complaints about high house prices. Those high prices were freezing potential first home buyers out of the market, it was claimed, there was vitriolic abuse directed to “baby boomers” who bought their houses decades ago and were sitting on huge price gains and there were notions, admittedly peddled by snake-oil salespeople, that a crash in prices would drag the economy into recession. These comments generally ignored the fact that, according to analysis from the Reserve Bank, affordability and the ability to service a standard mortgage was no harder in 2017 than in the average of the prior 25 years.
This article first appeared on the Yahoo 7 website at this link: https://au.finance.yahoo.com/news/3665708-004156966.html
Why Australians have lost $300 Billion this year
The total wealth of Australians has dropped by close to $300 billion since the start of 2018.
How much of that is yours?
The fall in house prices and now the slump in the stock market is undermining the wealth of Australian householders.
This is an important trend given the solid link between the change in wealth and household spending. Numerous studies show that when wealth increases, growth in household spending is faster than it would otherwise be. It appears that householders view their extra wealth in a manner that sees them lower their other savings or use that wealth as collateral for additional borrowing fund extra consumption. They may even ‘cash in’ their extra wealth and use those gains to fund additional spending.
When they observe falling wealth, experience weak wages growth and realise their savings rates are perilously low, they will adjust their spending – down.
The extraordinary vote in the Wentworth by election, with the 18 or 19 per cent swing against the Liberal Party, presents further evidence that the Morrison government is set to lose the next general election.
There is nothing particularly new in this with the major nation-wide polls showing the Liberal Party a hefty 6 to 10 points behind Labor.
The election is unlikely to be held before May 2019, which is a long 7 months away. A lot can happen in that time but for the Liberal Party to get competitive, but for this to happen there needs to be a run of extraordinary developments.
In the aftermath of the Wentworth by election, the betting markets saw Labor’s odds shorten.
While the odds vary from betting agency to betting agency, the best available odds at the time of writing was $1.25 for Labor and $4.00 for the Coalition.
If, as most now seem to suggest, Labor is ‘across the line’, $1.25 is a great 25 per cent, tax free return for 7 months ‘investment’. Yet, punters are not quite so sure and seem to be holding off the big bets just in case something out of the ordinary happens.
While some segments of the economy look quite good, at least on face value – note the unemployment rate and GDP – others that probably matter more to voters – husong, share prices, wages and other high-frewquency cost of living issues are all looking rather parlous. And none of these are likely to change soon.
There is an old saying for punters – odds on, look on. But $1.25 for Labor seem great value.
This article first appeared on the Business Insider website at this link: https://www.businessinsider.com.au/rba-policy-failure-stephen-koukoulas-2018-10
The RBA is failing on the most basic measures and it’s time it was held to account
How’s this for an economic plan?
The RBA cuts the official cash rate to 0.5 per cent and on the back of that, the unemployment rate drops to 4.75 per cent on a sustained basis, underlying inflation hits the mid-point of the 2 to 3 per cent target range and annual wages growth lifts to 3.25 per cent.
This is what a range of credible economic models suggest would happen with such a simple and transparent monetary policy move from the RBA. And what’s more, it is free to implement!It would be, on all measures, a good economic outcome.
So why is the RBA not going to do it?
What kind of monetarist poltergeist has possessed them it is now a bad idea to try and hit their inflation target, put tens of thousands more Australians into work, and stoke a much-needed rise in wages growth?
Why is the RBA the only central bank on the world seemingly obsessed with peripheral issues when the inflation target has been missed so comprehensively for so long?