Looks to me like the RBA has their finger on the trigger.
The talk at the moment is all about the slide in property prices. This is a little overblown in my mind, but a consolidation is definitely underway.
To get a sense of where the current momentum is, take a look at this chart here. I ripped it from a recent RBA speech.
This is ‘six-month ended annualised’. What that means is that it takes the last six months and then says, what if that pace lasted for the whole year?
So if prices grew 10% over the past six months, then the six-month ended annualised is double that – 20%.
Anyway, it amplifies trends, but it’s a good way to get a handle on what the current momentum is.
And what is shows is that the consolidation in prices is well underway in Sydney and Melbourne. On that annualised basis, Sydney looks like it’s falling at about 10% per annum. Melbourne looks closer to 5%.
We probably won’t actually hit those numbers in actual growth terms, but the momentum is clearly heading lower in those cities.
Interestingly, prices in Brisbane are dead flat, and it will be interesting to see if they get dragged down by the action in the bigger capitals. And over in Perth, it looks like the bottom is in, with prices having stabilised over the past six months.
That’s good news for Perth, but nobody cares about Perth. Not in policy circles anyway. If they did, we would have started cutting rates months ago.
And so what we’re looking at is a market that has clearly entered a consolidation phase. As I’ve stressed before, there’s no surprises here. The Sydney and Melbourne markets did get red-hot, and with the regulatory assault coming out of APRA in recent months, a consolidation really was inevitable.
The question now is, what do authorities do about it?
Now maybe they’re prepared to let prices slide for a while. They’ve been saying for a while that they’d like prices to ease a bit, but that has limits. They don’t want to crash the housing market. In fact, given the carnage it would unleash on the broader economy, they’d be looking to avoid a housing crash at all costs.
And while we’re on the topic, what does a crash in housing prices look like?
Well, I’d say if Sydney prices were consistently falling by 10% per annum, that’d be raising some red flags.
And so do we think that is what the RBA is doing here? Raising a red flag? They’ve released this clever little chart that shows that Sydney prices are currently falling at a 10% clip, and we wouldn’t want to see that going on for too long?
Are they flagging that rate cuts are coming if the market doesn’t pull up in time?
Here’s another piece of evidence. It compares auction clearance rates with the timing of recent rate cuts.
What it shows is that auction clearance rates have come off in recent months. Auctions aren’t as successful as they used to be.
What it also shows is that the last time clearance rates were this low, the RBA started cutting official rates.
Long story short, the RBA has all the justification they want to start cutting rates. No one would blame them.
The only question now is, do they want to?
As I said, I think they’ll be happy to let prices consolidate a little further, but not too much.
As far as I can tell, the RBA has their finger on the trigger already.
Make my day.