Debbie Shankar - 4 Oct, 2016

RBA Rates on Hold as Housing Market Readjusts

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eChoice RBA Commentary for October 2016

The RBA have left the official cash rate on hold at 1.5%.

This decision was based on:

o Growth being at expected levels;

o The housing market easing since this time last year;

o Dr Philip Lowe stepping into the role as governor; and

o A rising exchange rate needing to be monitored.

Economists suggest that the official cash rate will remain on hold for some time as the housing market steadies. This neutral view by the Reserve Bank of Australia (RBA) is also due to inflation estimates being on target. The only present concern for the RBA is a stubborn Australian dollar which continues to rise. However, this is not enough to warrant an interest rate cut.

The Australian Housing Market

Media reports are suggesting that Australian housing market prices are rising again. However, examination shows that this increase is focused in Sydney and Melbourne, and is not national. The RBA state that countrywide housing prices have declined when compared to last year’s data.

The first weeks of spring have refreshed the property market, with price increases recorded in Sydney and Melbourne. CoreLogic data estimates that quarterly growth for these capitals is around 5.8%. However, CoreLogic’s Tim Lawless also suggests that this is typical of the market at this time of the year. Plus, the market in both of these areas has a limited amount of stock, which typically pushes up prices.

Independent RBA analysis indicates that while Sydney and Melbourne’s markets have witnessed quarterly growth, annual loses were recorded. The RBA also notes that most capital cities dwelling values have declined. Furthermore, rental markets are at historic lows with vacancy rates increasing.

Expected Growth and Inflation

Economic data implies that the economy has grown at 2.75% over the first half of 2016. While mining investment will decline further in 2016/17, its peak GDP drop occurred in 2015/16. Therefore, mining decline will not harm the Australian economy.

The next inflation report is due out on October the 26th. The RBA’s forecast is for a 0.5% underlying rate for the quarter. This rate will put inflation within its 2 to 3% target. If the result is as predicted, then there will be no need for any policy change in the future.


RBA Leadership Change

The new RBA governor Philip Lowe has inherited an economy that has almost recovered from mining investment adjustments. At present, strong housing market construction levels, exports of commodities and education services support the Australian economy. While unemployment figures have dropped, the labour market is showing signs of room for upward movement.

The board have discussed low rates at length, bringing up both the positive and adverse outcomes of any tweaking. While lowering rates increase the cash flow of borrower households, it also reduces the income of bank shareholders (lender households). Borrower households have approximately three-times more interest-incurring debt than the average lender household has in interest earning assets. Consequently, this factor is a major concern.

Another concern is that since the financial crisis, borrower households seem to use any increase in cash flow to pay off their debt. Hence, lowering the cash rate does not stimulate the economy as expected because household spending does not increase.

The Stubborn Australian Dollar

The Australia dollar continues to present the RBA with a risk. However, the Reserve Bank seems comfortable with this given that the nation is nearing a decisive turning point. Firstly, wages look set to increase and secondly, the housing market is stabilising. Other positive factors include non-mining investment progress and that the mining sector has almost reached its turning point.

So, while the Australian dollar is a little higher than anticipated, economists propose that it does not represent a policy concern. In fact, economists are suggesting that the RBA will leave rates on hold for an extended duration.

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