Homing in on a rate cut

A jump in new dwelling approvals brings a glimmer of hope for the housing sector, but its overall health still demands another rate cut.

Today has seen the release of a raft of housing and building data from the Australian Bureau of Statistics which add to the already compelling case for a further interest rate cut. The RBA Board meets next Tuesday and the market is currently pricing the chance of a 25 basis point cut at around 50/50 although the true odds would have a 25 cut close to certain.

Housing credit growth plumbed a new 35 year low in September, with an annual rise of just 4.7 per cent. Over the last 30 years, annual housing credit growth has averaged 13.4 per cent. The take up of new housing credit is painfully slow, while those with a mortgage are using the recent round of interest rate cuts and rising real wages to reduce the principle and cut their overall debt levels.

This deleveraging seems sensible given the news that house prices resumed their fall in October. The RP Data five major capital cities index slumped 0.9 per cent in October, which means that house prices are down for 2012 and are around 6 per cent below the early 2011 peak. While there is nothing to fear in the current bout of house price weakness, the major banks have increased their provisions for bad debts to take account of the likely pick up in mortgage defaults in the year ahead.

As has been seen in the US, UK, Ireland, Spain, Japan and elsewhere, sharp falls in house prices are poison for banks, consumers and the overall economy. While the RBA does not target house prices, nor would it want to see a sharp rise in prices re-emerge, it would be extremely worried if there were to be any further significant falls.

There was some positive news with a 7.8 per cent rise in the number of new dwelling approvals in September. The dwelling approvals data is extremely volatile on a monthly basis but the net trend has shown 8 straight months of increase. This is good news that is added to by the strong rise in alterations and additions. It is now clear that dwelling investment will be making a solid contribution to GDP growth in 2012-13 and beyond. New housing construction is a vital ingredient to meet the strong population rise and the current signs suggest there is unlikely to be any serious shortage of housing over the medium-term.

A disconcerting offset to the rise in dwelling approvals is a near free-fall in non-residential building approvals. Non-residential building approvals fell 12.3 per cent in September and in trend terms have fallen 18 per cent in the last four months. This is likely to dampen the business investment outlook, at least in the near term. This weakness in non-residential approvals fits with the general pessimism in the business surveys for the non-mining parts of the economy.

All up, it is a picture for housing that is not all that strong. While the trend higher in new construction of houses is welcome, the other indicators are sufficiently weak to require further interest rate cuts if bigger problems down the track are to be averted.