SCOREBOARD: Home truths

After nine consecutive increases housing finance has finally come off the boil, while business confidence has fallen, making the RBA's rate cuts look pointless.

The data:

– Aussie home loans (by volume) fall 1.2 per cent in January, after a 2.1 per cent increase in December which was weaker than the market expectation for -0.6 per cent. Annually, home loans are 10 per cent higher.
– Excluding refinancing, loans fell almost 3 per cent after a 2.1 per cent increase in December. Loans ex refi are 7.6 per cent higher annually.
– By component, loans for construction rose 0.2 per cent (1.8 per cent year on year), loans for new purchases fell 6 per cent ( 12 per cent year on year), while loans for established dwellings fell 1.2 per cent (11 per cent higher annually).
– By value, loans to investors dropped 7 per cent and are flat over the year.
– First homebuyers accounted for 20.3 per cent of January loans, compared to 20.9 per cent in December.
– NAB’s business survey shows conditions rose 1 point to 3 (average 5.5), although confidence fell 3 points to 1 (average 6).


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What the data means:

Following nine consecutive increases, of about 16 per cent in total, home loans fell for the first time since March 2011. It's probably noise, but the interesting thing is that the RBA’s rate cuts don’t appear, at this early stage, to have really influenced things in a positive way. This isn’t a judgement I’m making solely from the housing finance numbers (they’ve been rebounding but remain weak as the above chart shows). The broad spread of data show that the RBA’s cumulative 50bp rate cuts hasn’t had much impact and if anything, it’s made things worse.

Business confidence for instance is weaker now than prior to the cuts, as was consumer confidence immediately following the decision – although it has subsequently bounced back a bit. All of this has strengthened my, admittedly counter-intuitive, view that the RBA’s cuts have done more harm than good, firming up as it were the existing confirmation bias that the economy was or is weak. More broadly, and while the dataflow has certainly been softer of late, I don’t think, for reasons I’ve already discussed, that it is actually correct to view this as a sub trend economy. Headline data certainly suggests it is, but it’s when you dig into the figures that you realise this is highly unlikely. But it has softened and that’s with extra policy support.

The RBA has stated that a material decline in demand would be required to see rates lowered again. Recent data has been softer but it certainly doesn’t show a material decline. The fact that confidence and headline data has actually deteriorated, I think supports the RBA board’s stance. Fine tuning has done nothing, only confirming in people’s minds that things must be weak. I find it extraordinary that business confidence is weaker here (relative to its average) than in Germany or indeed France.


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Adam Carr is senior economist at ICAP Australia. See Business Spectator's glossary for definitions of technical terms used in SCOREBOARD articles.

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