An RBA rate cut is not about housing – it’s about exports and investment

Tue, 06 Nov 2018  |  

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.htm

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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 is why the RBA would be wise to cut interest rates.

To reiterate – the wisdom in cutting interest rates is not to reflate house prices. On the contrary, macro-prudential rules and the tight credit conditions for mortgages should remain in place if interest rates are lowered. Lower interest rates matter because they would help guard against the fall out from the unfolding household wealth destruction which would see annual GDP growth slowing to around 2 per cent, it would see the unemployment rate get back up towards 6 per cent and inflation would fall from already near record low levels.

Most analysis on interest rates makes the mistake of focusing on the housing market if a rate cut is delivered.

Ignored is the fact that the business sector has over $940 billion of bank debt and another half a trillion or so in corporate debt. Lower interest rates would free up cash flow on this business debt by lowering debt service costs. This would not only help business to invest and hire more, it would underpin new business investment as the interest rate threshold for expansion is lowered.

What’s more, interest rate cuts would likely see the Australian dollar fall, especially when the US is in a clear cycle of interest rate increases. A lower Aussie dollar would give the export sector an extra boost, adding to economic growth and national incomes and would provide an offset to the looming weakness in household spending. It would also help local businesses competing with aggressive low cost importers as the price of imported items rose.

The housing market is important in itself but more importantly, in the way it risks dragging the rest of the economy down with it.

It is this latter point where policy should be directed for the sake of economic growth and stability.

With inflation locked in at a remarkably low rate, the most effective policy change would be to cut interest rates to shore up the business sector in the risky time.

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THE LATEST FROM THE KOUK

It’s time to end the “strong economy” propaganda

Thu, 20 Jun 2019

This article first appeared on the Yahoo Finance website at this link: https://au.finance.yahoo.com/news/its-time-end-strong-economy-propaganda-230414837.html 

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It’s time to end the “strong economy” propaganda

For the last year or so, it has been obvious to anyone with an open mind that the economy is in trouble. Unfortunately, the government and the Reserve Bank not only ignored this growth slump, but they ran a propaganda campaign saying the economy was “strong”, that unemployment would keep falling and wages growth was poised to pick up.

It might have been politics that lead the RBA and Treasury to this view with the recent election swinging on the economic credentials of both major parties. Ahead of the election, the RBA and Treasury were loathe to undermine the government with an honest assessment of the rapidly spreading economic problems.

It is possible that the forecasts were a simple error, which sometimes happens when an external shock hits the economy.

Either way, things are so bad in the economy right now that forecasters are rushing to out-do each other on how low interest rates will go in this cycle. Some are canvassing negative interest rates, printing money or the need for a fiscal policy boost if the economy remains in its economic funk.

Time will tell.

The range of forecasts that where regularly produced by the government (Treasury) and the RBA up until very recently were unambiguously optimistic. The forecasts ignored all hard data on the economy, which suggests it may have been a political strategy to remain upbeat, rather than it being a clumsy forecasting error.

An update on my house price bet with Tony Locantro

Thu, 20 Jun 2019

This article first appeared on the Yahoo Finance website at this link: https://au.finance.yahoo.com/news/house-prices-are-still-dropping-but-bottom-sight-210000929.html 

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An update on my house price bet with Tony Locantro

It is difficult to think of a bigger issue that gets Australians fired up than house prices.Regular readers will know that back in September 2018, I made a bet on house prices with Tony Locantro, a fired-up Investment Manager with Alto Capital in Perth.

Tony wont mind me saying this, but he is what is called an ‘uber bear’ on house prices – he reckons prices are grossly inflated and are overdue to collapse. On the other hand, I reckon there is a cycle and that after the surge up to 2017, house price falls were inevitable, but that the decline would last only a couple of years and would not be too severe.

The bet was framed around a peak-to-trough fall in prices of 35.0 per cent in either Sydney, Melbourne or the 8 capital cities measure used by the Australian Bureau of Statistics. If prices fell by more than 35 per cent at any stage from the peak until the end of 2021, Tony would win, if the fall was less than 35 per cent, I would win.

Simple.

That background is important because the ABS just released the official dwelling price data for the March quarter 2019.

In the quarter, dwelling prices fell 3.0 per cent in the 8 capital cities and dropped 3.9 per cent in Sydney and 3.8 per cent in Melbourne.