The RBA raised a few eyebrows when it went out of its way to have a detailed look at housing in the latest SMP. Looks to me like the RBA is getting ready for another boom.
There was a bit of a surprise in the Statement on Monetary Policy (SMP) the RBA released last week.
Normally, it’s a bit of a snooze fest – by design. The RBA tries very hard to be as boring as possible, lest it spooks skittish markets in one direction or another. It doesn’t like surprises.
That’s why it raised a few eyebrows last week when, unannounced, it worked a special review of the housing market into the SMP.
The first question is why? Sure the housing market is important, but it always has a special place reserved for it in with all the other variables. And nothing’s changed dramatically in the past 3 or 6 months that needs special explanation…
So why single it out?
I think Glenn and the RBA are subtly letting people know what’s going to be affecting the RBA’s decision on rates this year – and how housing fits into that picture.
Because the thing to remember is that there have been a spate of calls in the media over the past six months demanding that the RBA deals with the “housing problem”.
That’s a bit of a vague term, and sometimes takes a couple of forms. Sometimes it’s about the market tipping into a speculative bubble. Sometimes it’s about a market that’s totally pricing out first home buyers.
But the central theme is that prices are rising too far too quickly, and the RBA needs to raise rates to knock it on the head.
And while they’d never say it with as many words, this feels like a bit of a response to those calls to me. So let’s see what they’ve got to say.
First up, they remind us all that prices are on the march.
Housing price inflation over 2013 was around 10 per cent, with the rate of increase slightly stronger in the second half of the year than in the first half.
But they also note that prices aren’t the only guide to how strong the market is right now.
Sales are up:
dwelling turnover (or sales) has been picking up since the middle of 2013 and auction clearance rates remain at very high levels (Graph B2).
Stock on market is down:
The total number of dwellings for sale (listings) has also declined, which tends to occur when the market is strong, as sales typically pick up more strongly than new listings.
And discounting is easing:
The extent of seller discounting (relative to the original listing price) and the average time taken to sell a property also vary inversely with the housing cycle and have fallen considerably, to be close to their lowest levels in nearly a decade.
Ok. So far, so good. The RBA is reminding us that there’s not much unusual with the current cycle. This is how a recovery always looks, and so far it’s going to plan.
Next the RBA looks at the make-up of the market. It notes that turnover has been driven by investors and repeat-buyer owner occupiers. In particular it notes the strength of investor activity in NSW:
“Growth of investor loan approvals in New South Wales has been particularly strong at nearly 55 per cent over the year to November.”
It then notes the weakness in FHB buying so far, but points the finger at:
“The changes in state government incentives for first home buyers away from established dwellings and toward new dwellings…”
But have investors lost their mind in a speculative frenzy? The RBA doesn’t think so.
“The upswing in housing asset values to date has not been fuelled by a rapid expansion in borrowing. Growth in housing credit is gradually picking up but remains relatively moderate and the ratio of households’ housing debt to income has been little changed at around 130 per cent (Graph B5).”
And are prices racing out of control? Again, the RBA doesn’t think so. In fact, they argue it’s exactly what you’d expect to see with interest rates at these levels.
They produce this graph, which is a cracker I reckon.
What it shows is how closely price growth follows interest rates. And what they’re saying is, “of course prices are rising. Look at interest rates. Duh!”
Or in the more diplomatic econo-speak:
The rise in housing prices over the past year or so is broadly consistent with the historical relationship between interest rates and housing prices. The reduction in interest rates has eased some financing constraints, reduced the user cost of housing and increased the attractiveness of investing in riskier, higher-yielding assets, resulting in stronger demand for residential property. Indeed, this effect of lower interest rates on housing prices is an important channel through which expansionary monetary policy supports economic activity.
Do they sound worried?? Hardly! In fact, they sound quite pleased with themselves. ‘House prices are up, we’re supporting the economy. Get off my back buddy, I’m just doing my job.’
And that’s as much as they have to say.
Any mention of FHBs being priced out of the market?
Any mention of a speculation frenzy?
Any mention of a bubble?
And so in there own subtle way they’re letting us know that, as far as they’re concerned, it’s just not a consideration when it comes to rates. It’s not keeping them up at night.
And they’re telling the people who are looking for a rate rise to try and take some heat out of the housing market to forget it. That’s not what rate rises are for.
And with the generally dovish tone in the rest of the SMP, it tells us that the RBA isn’t even thinking about rate rises yet. The next move from here is still definitely down.
As far as econo-speak goes, it’s as clear as it gets.