eChoice RBA Commentary for November 2017.
The official cash rate stays at 1.5% as:
• Wage growth is minimal;
• The housing market continues to cool;
• Household debt is rising;
• Core inflation is below target; and
• CPI is below 2.0%.
With Australians having minimal wage growth and a record debt-to-income ratio, many are aiming to pay more off their mortgages before rates rise. Consequently, consumer spending and inflation levels fell below targets, which has resulted in the Reserve leaving rates on hold yet again.
Australian wage growth averaged 3.38% from 1998 to 2016. In 2008, it reached an all time high of 4.30% and a record low of just 1.90% in the 2016 third quarter. This figure remained consistent throughout 2017.
It has now been 83 months since a rate rise. Back then, in Novemeber 2010, the cash rate was 4.75%. Currently it sits at 1.5%. Also, in 2010, you would’ve paid 7.15% for the average discounted home loan. In today’s terms, the discounted rate sits at 4.45%.
The value of Australian housing in October 2017, according to CoreLogic, was $7.3 trillion, with an outstanding mortgage debt of $1.69 trillion. At present, 52.4% of Australian household wealth is housing related.
Higher debt, according to economists, is a result of overpriced housing. For instance, the median for a home in Sydney in December 2011 was $567,000. At the time, the average mortgage rate was 6.55%. Therefore, if you had a 20% deposit, your repayment was $2,881 per month. However, with interest rate cuts, you’d now be paying around $2,284 per month.
But, if you bought a home in June this year at the median price of $880,000, your mortgage payments would be $3,891 even with a 20% deposit and a 4.45% interest rate. So, while interest rates are lower, homes prices are higher. Thus, you are now paying far more as a percentage of your household income on housing, which means you have far less to spend elsewhere.
With news that a rate rise is on the horizon, Australians have wound back their spending. According to the latest figures, consumer pricing was lower than expected as was core inflation.
Data shows that underlying inflation averaged 1.85%, which was slower than the second quarter and under estimates. Core inflation also came in under Reserve Bank targets for the seventh straight quarter, the longest period ever recorded.
Economists attribute lower spending to wage growth being at an all-time low, and Australian households saving more to pay down debt. As a result, economists suggest that rates will be on hold for longer than initially indicated because without the need to curb rising inflation there is no need to lift rates.
There are now 9.9 million dwellings in the Australian market with around 472,368 sales made over the last year. These sales reached a value of $294.9 billion.
Quarterly data suggests that the housing market has entered the correction phase. Although, annual growth in most capitals is still active.
|Residential Housing Prices October 31, 2017|
|All Dwellings %|
|Month||Quarter||Annual||Total Return||Median Value|
Nationally, the Australian housing market peaked in November 2016. Since then, the market’s prices have lost momentum. October conditions were flat across the combined capitals and in regional areas. However, capital city growth over the last 12-months reached 7.0% and regional areas 4.9%.