It's house prices not China that is the biggest threat to growth

Mon, 31 Mar 2014  |  

The RPData five city house price index rose a thumping 2.3 per cent in March which is a stunning rate of increase at a time when house prices are already elevated.

For the first three months of 2014, the RPData series shows house prices up 3.5 per cent, or an annualised pace of close to 15 per cent. This is a rate of increase that must be causing the RBA some concerns as it continues to sit on official interest rates at a record low 2.5 per cent.

While the RBA does not target house prices with its monetary policy settings, it is well aware of the macroeconomic policy risks that come with house price booms... and busts. House price booms generally lead to a pick up in speculative borrowing and a ratcheting down of lending standards by financial institutions as every one wants to get on board the price surge.

House price busts, which have not occurred to any significant extent in Australia in modern economic history, are characterised by faltering consumer confidence, an escalation in bank bad debts, a fracturing of bank balance sheets and inevitably, recession.

Indeed, the recent deep recessions in the US, UK, Ireland, Spain, Japan and Span (to name but a few) were all driven to a large extent by house price crashes.

A house price crash is not good news.

So how should a house price crash be averted?

Simple – don't let the house price gains get too big in the first place. The time tested and easy way to lean against unwelcome house price booms is interest rates. A nudge up in rates at a time when the economy is travelling smoothly and when there are some signs that broader inflation risks are ticking higher is clearly prudent.

It is a preventative approach which the RBA seems to be slow to cotton on to in the current phase, at least in its actions, if not its words.

An interest rate hike soon would serve multiple purposes – importantly it would provide a material back up to the RBA Governor Glenn Stevens' view on the imbalances in the housing market. Borrowers might be more cautious as their debt servicing costs edge up with the prospect of more hikes down the track. Lenders would also take note and tighten their stress testing of potential borrowers looking to enter the housing market. From a macroeconomic perspective, it would guard against some of the price pressures showing up in the recent CPI data.

The RBA meets tomorrow knowing house prices - and not China - are perhaps the biggest threat to the 23 years of unbroken economic growth in Australia. It knows the economy is rebalancing to the point where 3 per cent GDP growth in 2014 is all but locked in, with the risk tilted squarely to growth at 3.5 per cent. It also knows that a 2.5 per cent cash rate is not appropriate.

The solution is clear - rates need to rise. While interest rate action is unlikely tomorrow, the RBA Board should, in its statement at 2.30 pm, be setting the markets, home buyers and mortgage lenders up for the prospect of higher interest rates in the months ahead.

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Change of view on interest rates

Fri, 24 May 2019

Having been the only economist to correctly anticipate an interest rate cut from the RBA when close to 50bps of interest rate hikes were priced in to the market last year (See Bloomberg 17 August 2018), I have agonised over the exact months the cuts would be delivered and then how many rate cuts would be needed to reflate the economy.

Recently, I was of the view that the RBA would need to cut 100bps from now, to a level of 0.5%, but I did so with relatively low confidence. This is why I recommended all clients to close their long interest rate positions on 17 April 2019 (when the implied yields were 1.10% for the mid 2020 OIS; 1.35% on 3 year yields and the Aussie dollar was just over 0.7000 at the time).

Like in most good trades that were massively in the money, I left a little money on the table while I reassessed the outlook.

Since calling for interest rate cuts from the RBA, a lot of water has passed under the bridge, especially in the last few weeks.

Events mean I am changing my view on interest rates and have been placing / will be looking to implement new trades.

Watch out Australia: There's a flood of dismal economic news on the horizon

Wed, 01 May 2019

This article first appeared on the Yahoo Finance website at this link:


Watch out Australia: There's a flood of dismal economic news on the horizon

The Australian economy is in trouble and Scott Morrison and the Liberal Party government need to come clean and acknowledge this and outline a framework how this period of economic funk is to be addressed if they win the 18 May election.

The Liberal Party is campaigning in the election on a “strong economy” and being “good economic managers”, bold claims that fly in the face of the latest score card for the economy.

That scorecard shows a flood of what is, frankly, disappointing or even dismal economic news. Australia is going through a very rare recession in per capita GDP terms and last week saw data showing zero inflation in the March quarter. Contribution to these indictors of economic funk is the fact that well over half a trillion dollars of householder wealth has been destroyed as house prices have tumbled.

Add to that the fact reported by the Australian Office of Financial management last week that gross government debt is $543 billion, almost double the level that the Coalition government inherited in September 2013, and the scorecard is looking very ratty indeed.

As the ad man used to say, “but wait, there’s more”.