Yesterday’s 25 basis point rate cut, though called for by many industry groups, is a worrying portent for 2014 – the first year of Julia Gillard’s second term (no sniggering, please) or Tony Abbott’s first year as prime minister.
It’s as if we’ve been mesmerised by the 25 per cent appreciation in equities in the past year, and distracted from some nasty structural features of the Australian economy – particularly the real limits on the ‘rebound’ in house prices.
As detailed 10 days ago (Canberra will have hell to pay on housing, April 26), there are structural blocks to the ‘rebound’ – factors that were able to stretch and stretch through the 2000s, but which have run their course this decade.
The long term trend towards workforce participation has probably peaked, according to Deloitte Access Economics. The one-income home got closer to being a two-income home and people borrowed more to buy houses. But peaking at just over 65 per cent participation, that factor can no longer push prices higher.
Second, the renovation fever that swept the nation in the years up to, and well into, the GFC has cooled, with credit data showing punters no longer keen to borrow to improve the value of homes from the inside.
Finally, the big worry is that owner-occupiers have been fleeing the market, to be replaced by investors – some of whom have no doubt been given a false sense of security by stock market gains.
Lending money at record low interest rates (yesteday’s cut took the cash rate lower than at any time since the Reserve Bank began keeping records in 1959) should be easy, but the people who actually need a home of their own are baulking at taking large loans.
ANZ boss Mike Smith even made the extraordinary claim on last weekend’s Inside Business television program that there was little point in cutting rates this week, as it would not have the desired stimulatory effect – indeed, credit data has not shown the expected rebound in borrowing over the course of this easing cycle.
So what’s going to happen to house prices? Housing Industry Association senior economist Shane Garrett told me yesterday that he’d been disappointed with the March quarter ABS housing data, which fell far short of what the HIA hopes will become “sustainable growth in building activity and house prices”. Across all capitals, the first quarter produced just a 0.1 per cent gain, and three of our eight capitals fell in value – Brisbane, Adelaide and Hobart.
Garrett doesn’t see a housing slump next year, as he thinks the “excess” in prices has already been purged from the market, with the peak-to-trough falls of up to 10 per cent (that was in Hobart) over the past 18 months.
But the rebound is not going as planned. “The robust price growth we saw at the end of 2012 has petered out and once again the market will have to struggle to regain momentum,” says Garrett.
HIA’s chief economist, Harley Dale, said after the rate cut yesterday: “As we enter mid 2013 there is still no evidence of a sustainable national recovery in residential construction, despite such evidence being crucial to a successful rebalancing of Australia's economic growth ... The further reduction in interest rates by the Reserve Bank boosts the prospects of the residential construction industry mounting a sustainable recovery.”
It’s a chicken and egg problem – house price rises will inspire more investment in new homes, but long term increased supply (if it ever happens) will bring the entire market into better balance with Australia’s strong population growth, which is being stoked by the arrival of nearly 300,000 immigrants a year.
A property price crash, though probably hoped for by young would-be market entrants, would play havoc with consumer and business confidence. But if we did see a cascade of sellers, the federal government would be hard-pressed to stimulate the market as it did in 2009.
The constraints listed above suggest the best upside scenario is for modest price growth, and a rebalancing of rental yields and the cost of holding property, which have been way out of whack through the years of large capital gains (see: The irregular ratio spooking property, February 1).
It will be some months before we see whether yesterday’s rate cut can restore credit growth and keep house prices moving up, rather than down.
Both sides of politics will be hoping that this happens. The last thing the next government wants is falling house prices, weak business and consumer confidence, soft company earning, further erosions to the federal tax revenues and some of the hot money that’s been buoying equities and keeping bond yields low, deciding it's time to head home.
The Coalition in particular, will not want any of that going on as it slashes spending. Cutting into a downturn is bad, but cutting into a house-price slump would be madness.
So pollies on both sides better get their messages right on housing. Talk it up, folks. We all have a lot to lose.