Interest rates lowered by 50 basis points on 1 May 2012
Statement by Glenn Stevens, Governor of the RBA: Monetary Policy Decision 1 May 2012
At its meeting today, the Board decided to lower the cash rate by 50 basis points to 3.75 per cent, effective 2 May 2012. This decision is based on information received over the past few months that suggests that economic conditions have been somewhat weaker than expected, while inflation has moderated.
Growth in the world economy slowed in the second half of 2011, and is likely to continue at a below-trend pace this year. A deep downturn is not occurring at this stage, however, and in fact some forecasters have recently revised upwards their global growth outlook. Growth in China has moderated, as was intended, and is likely to remain at a more measured and sustainable pace in the future. Conditions in other parts of Asia softened in 2011, partly due to natural disasters, but have recently shown some tentative signs of improving. Among the major countries, conditions in Europe remain very difficult, while the United States continues to grow at a moderate pace. Commodity prices have been little changed, at levels below recent peaks but which are nonetheless still quite high. Australia’s terms of trade similarly peaked about six months ago, though they too remain high.
Financial market sentiment has generally improved this year, and capital markets are supplying funding to corporations and well-rated banks. At the margin, wholesale funding costs have declined over recent months, though they remain higher, relative to benchmark rates, than in mid 2011. Market sentiment remains skittish, however, and the tasks of putting European banks and sovereigns onto a sound footing for the longer term, and of improving Europe’s growth prospects, remain large. Hence Europe will remain a potential source of adverse shocks for some time yet.
In Australia, output growth was somewhat below trend over the past year, notwithstanding that growth in domestic demand ran at its fastest pace for four years. Output growth was affected in part by temporary factors, but also by the persistently high exchange rate. Considerable structural change is also occurring in the economy. Labour market conditions softened during 2011, though the rate of unemployment has so far remained little changed at a low level.
Recent data for inflation show that after a pick up in the first half of last year, underlying inflation has declined again, and was a little over 2 per cent over the latest four quarters. CPI inflation has also declined, from about 3½ per cent to a little over 1½ per cent at the latest reading, as the weather-driven rises in food prices in the first half of last year have, as expected, now been fully reversed. Over the coming one to two years, and abstracting from the effects of the carbon price, inflation will probably be lower than earlier expected, but still in the 2–3 per cent range.
As a result of changes to monetary policy late last year, interest rates for borrowers have been close to their medium-term averages over recent months, albeit tending to increase a little as lenders passed on the higher costs of funding their books. Credit growth remains modest overall. Housing prices have shown some signs of stabilising recently, after having declined for most of 2011, but generally the housing market remains subdued. The exchange rate remains high even though the terms of trade have declined somewhat.
Since it last changed the cash rate in December, the Board has maintained the view that the setting of policy was appropriate for the time being, but that the inflation outlook would provide scope for easier monetary policy, if needed, to support demand. The accretion of evidence over recent months suggests that it is now appropriate for a further step in that direction.
In considering the appropriate size of adjustment to the cash rate at today’s meeting, the Board judged it desirable that financial conditions now be easier than those which had prevailed in December. A reduction of 50 basis points in the cash rate was, in this instance, therefore judged to be necessary in order to deliver the appropriate level of borrowing rates.
It’s a millionaires’ malaise, but housing market healthy for most Australians: Christopher Joye
For years I’ve encouraged analysts and commentators to avoid using the performance of property in the unique areas in which they live – e.g., Mosman, Toorak, Whale Beach, or the Mornington Peninsula – as a proxy for Australia’s diverse, $4 trillion housing asset class.
The behavioural tendency to extrapolate out from our immediate environs to the 8.5 million homes not located in our street leads to what psychologists might call an “anchoring bias”. It is no different to taking a micro-cap listed on the ASX and assuming that its returns are a good guide for the ASX All Ordinaries Index. If anything, individual homes, and specific suburbs, are even more heterogeneous.
This anchoring bias is arguably exacerbated by the fact that media organisations tend to focus the bulk of their efforts on covering $1 million-plus properties. But as my first chart below shows, these homes are irrelevant to 95% of all Australian property buyers. In particular, this diagram depicts the distribution of all sales over the last 12 months sorted by price. You can see that homes worth more than $1 million accounted for just 5.7% of total sales. For what it is worth, 90% of all Australian homes sales were for dwellings worth less than $800,000.
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Anyone familiar with Australia’s housing market will intuit that this makes sense. The median dwelling price across all regions and property types was only $400,000 in December 2011. As I reported earlier in the week, Australia’s dwelling price-to-disposable household income ratio has now fallen 12% from a peak of 5.2 times to its current level of around 4.5 times.
Notwithstanding these facts, the property lift-outs in most newspapers and magazines dedicate an inordinate amount of space to the tiny minority of homes that trade for more than magical million-dollar mark.
We also know that by dint of their incomes, many of the analysts, economists, retail bankers, fund managers, investment bankers, accountants and financial planners who are called on to proffer comment on Australian house prices live in its more salubrious suburbs. In this respect, they are especially ill-placed to make inferences about the broader market.
This is likely why during downturns, such as in 2008 or 2011, one frequently finds investment bankers amongst the most “bearish” on conditions, with shrill claims they are down 10% to 30%. Ironically, the bankers are probably right if they are talking about Bellevue Hill, Bondi or Point Piper. But these statements are meaningless when it comes to the 450,000 homes that sell each year that are not located in these areas.
Of course, if the bankers’ communities were representative of the national market there would be no bias. But they are not. In fact, they have systematically underperformed during these corrections. My next chart shows the change in the value of homes situated in Australia’s “cheap”, “expensive”, and “mid-priced” suburbs since the housing market started flat-lining in April 2010. The chart beneath it presents the same data in a slightly different way by comparing Australia’s most expensive suburbs with all others.
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If you happen to live in the most affordable 20% of suburbs, the value of your dwelling drifted by only a trivial 1.5% over the last 1.5 years. If you inhabited the price cohort above, which we classify as the “middle 60%” of suburbs ranked by price, your home’s value declined, on average, by a still fairly modest 3.7%.
It is, by way of contrast, the affluent who have suffered the worst. The most expensive 20% of suburbs across Australia have registered much more substantial price falls of about 6.5% over this period. And you can bet that if you broke this group down further, into, say, the dearest 10% of suburbs, you would find steeper losses again.
So what explains the inferior performance of Australia’s most expensive localities over the last year or two? I would argue one candidate is post-GFC structural adjustment.
The financial services industry, which was one of the principal drivers of demand in the dearest suburbs in Australia’s non-resources states, has now quite radically altered its future growth expectations.
The retail banks, investment banks, and stock broking firms are not shelling out anything like the pay packets that were prevalent in the period preceding 2007. The abysmal performance of the share market more generally has weighed heavily on the portfolios of wealthier individuals, who were often loaded up with equities by their advisors. If only they had more cash and fixed-income!
I would venture that this new “air pocket” in housing demand is most relevant to non-resources states, and to homes valued at between, say, $3 million and $10 million. Australia is still creating extraordinary wealth, with the list of billionaires now numbering in excess of 20. And private sector wages growth – and total disposable household income growth – have been expanding at normal rates.
In the last one to two years, home buyers have received a tremendous affordability dividend, with the circa 4% decline in house prices accompanied by healthy disposable income growth of around 5% per annum. And now due to the RBA’s benevolence, mortgage rates are 0.4 percentage points lower than they were in October 2011.
So I suspect the housing market will remain healthy for most Australians. RP Data-Rismark’s new daily house price index, which is quoted by the ASX, has reported small capital gains over February and March. There is nevertheless likely to be a fundamental downward adjustment in that specialised $3 million to $10 million segment that was once dominated by financial services professionals.
On the other hand, it is questionable whether demand at the extreme heights of the market, where estates trade for more than $20 million, and buyers typically have little debt, will be much affected.
Australia will keep on producing individuals worth hundreds of millions, if not billions, of dollars. For the time being, however, fewer will do so in financial services.
Why rents will keep rising: Tim Lawless
Rental rates across the combined capital cities grew by 6.3% in 2011, compared with a fall in home values of 3.6%. The superior growth performance of rents compared with values has been a consistent trend over the past five years.
Since the beginning of 2006, rental growth across the combined capital cities has outpaced the growth in home values. Over the period December 2005 to December 2011, capital city home values have increased by a total of 34.5% compared to rental rates having increased by a total of 46.8%. On an inflation adjusted basis, capital city home values have increased by 15.4% over the period and rental rates have increased by 27.7%.
Looking at the performance across individual years highlights the fact that you typically see either rents or values growing or in some instances both. Across each year highlighted, one of either values or rents has grown by more than 5%. The results also highlight that if value or rental growth slows, typically the other will increase; the markets tend to be counter-cyclical.
The results are also indicative of a disconnect between housing demand and housing supply given that in any given year values or rents are growing at a rate that is in excess of the growth in inflation.
Across individual capital cities over the five years to December 2011, house values have grown by as little as an average annual rate of 0.1% in Perth and by as much as 7.9% per year in Darwin. Across the combined capital cities, house values have increased at an average annual rate of 4.4% over the last five years.
In comparison, house rents have recorded average annual growth of as little as 2.8% per year in Adelaide and as much as 9.9% annually in Darwin. Across the combined capital cities, rental rates for houses have increased at an average annual rate of 5.8% pear year over the last five years, a full 1.4 percentage points higher than average annual value growth.
Focusing on units, they have enjoyed stronger value growth over the past five years than houses. Across the combined capital cities unit values have increased at an average annual rate of 5.5% per year over the period and have increased by as much as 12.5% per year in Darwin and by as little as 0.9% per year in Perth.
Rental growth for units has outpaced the growth in the value of units over the last five years. Unit rents have increased at an average annual rate of 6.2% annually over the past five years and have increased by as much as 11.9% per year in Darwin and by as little 3.1% per year in Canberra.
The average annual rate of rental growth for houses has outpaced that of units over the past five years in each city except Melbourne, Adelaide and Canberra. Duringthe same timeframe, rental growth for units has outpaced value growth in Sydney, Brisbane and Perth.
Over 2012, RP Data expects that growth in rental rates will continue to outpace the growth in home values. The reason being that we are not anticipating any ‘real’ growth in home values. Additionally, tight rental market conditions accompanied by an insufficient supply of new housing is likely to result in superior levels of rental growth to that of home values.
As always, there is likely to be some disparity between rental growth across individual capital cities. Markets such as Sydney, Brisbane and Perth are anticipated to be the strongest performers for rental growth due to the large discrepancy between housing supply and demand and low rental vacancy rates. On the other hand, rental pressures are not expected to be anywhere near as strong in Melbourne and Adelaide due to higher rental vacancy rates and less of a disparity between housing demand and housing supply.
Cautious optimism as home sales trend upwards
The clearance rate for the first weekend of the autumn home auction season in Sydney was strong but it is still too early to gauge the underlying sentiment of buyers.
The auction clearance rate of 71.6 per cent on Saturday was well above the 48.2 per cent reported for the corresponding weekend last year. But with only 76 properties offered at the weekend, compared with 111 last year, a clearer trend will not emerge until the number of properties on offer increases.
Of the 63 reported auction results, four were withdrawn and 48 sold at an average of $550,000. The median price of houses sold was $595,025.
The most expensive Sydney property reported sold at the weekend was a three-bedroom house in Burwood for $1.17 million. The most affordable was a three-bedroom townhouse in Campbelltown that sold for $186,500.
Last year ended on a subdued note for the Sydney auction market with year-low clearance rates in December despite significant numbers of properties being offered for sale.
Although considerable numbers of first-home buyers were active in the marketplace over the last three months of the year, the market generally had run out of puff by year’s end.
Sydney was clearly the best performer of all capital city housing markets last year with median house prices down by just 1.3 per cent over the year and unit prices down by 0.9 per cent.
The resilience of the Sydney market reflects the underlying shortage of accommodation in the city, with a chronically tight rental market.
This year is set to be one of gradual recovery in the Sydney market with median house prices expected to rise by between 3 and 5 per cent over the year.
First-home buyers will be quiet early in the year as demand from that group was brought forward at the end of last year.
But expect this to be offset by increased activity from change-up buyers in the middle price sector of the market and investors in the lower sectors – particularly the unit market – that will keep buyer activity ticking along.
Although the prestige market will remain relatively subdued initially, expect some momentum to build through the year on the back of increased activity by aspirational buyers seeking value in quality properties in prestige locations, particularly in the $2 million to $3 million price range.
Unemployment in Sydney has increased in recent months, but the outlook remains positive despite indications of further job shedding, particularly in the finance sector.
The positive outlook will be enhanced by a further fall in official interest rates expected to be announced by the Reserve Bank board after its meeting tomorrow.
Written By Dr Andrew Wilson. Sydney Morning Herald. 6 February 2012
House prices may have hit bottom
Australia’s house prices fell in every quarter last year but they may have hit bottom, new figures show.
Housing data released by RP Data-Rismark today shows that the rate of decline in house prices across the nation slowed towards the end of last year.
“The December quarter was the year’s smallest quarterly decline,” RP Data research director Tim Lawless said.
Capital city house values fell nationally, in seasonally adjusted terms, in the last three months of 2011 by 0.5 per cent, RP Data-Rismark’s figures show.
That followed a larger decline in the previous June and September quarters of 0.8 per cent and a substantial national drop of 1.5 per cent in the March quarter for 2011.
Last week, rival data provider Australian Property Monitors released figures for the same period which showed national house prices stayed largely the same for the December quarter.
The figures suggest the rate of decline in house prices is tailing off.
Sydney’s house prices, the country’s most resilient because of a shortage of housing and state government first home buyer incentives, rose in the December quarter by 0.7 on seasonally adjusted terms, RP Data-Rismark’s figures show.
According to RP Data, Melbourne’s prices fell 0.5 per cent in the December quarter, contradicting figures from APM and the Real Estate Institute of Victoria which show house prices rose by 1.1 and 1.9 per cent respectively in the same period.
The housing market in all other Australian capitals apart from Sydney continued to soften in the last few months of 2011, RP Data said.
Perth values fell 2.1 per cent, Melbourne’s 1.4, Brisbane’s 1.3, Adelaide’s 1.2, Darwin’s 1.1, Hobart’s 1 per cent and Canberra by 0.1 in the December quarter, RP Data said.
Revised figures show November was better than previously reported, with growth of 0.5 per cent seasonally adjusted, the figures show.
“One of the things we’re expecting to see following the interest rates cuts last November is more activity,” Rismark managing director Ben Skilbeck said.
“We expect transaction volumes to pick up in February and March,” he said. “We would expect the negative growth to abate.”
Written by Simon Johanson, Sydney Morning Herald, 31 January 2012
State by state guide to 2012 house prices
CALLING the residential property market for this year is a simple matter: things are going to get better, unless they get worse, and some parts of it will just go sideways.
Industry specialists are quick to allude to economic uncertainty stemming from Europe, but are also fairly quick to abandon commentary on that and concentrate on the strengths they see in the domestic market. And most, having delivered the European caveat, are surprisingly confident of a strong and robust year and are quick to name places that show the most promise.
“The best bets for 2012 are Perth followed by Brisbane. Sydney is solid as a rock. But don’t expect much in Melbourne ’til the third or fourth quarter,” says Andrew Wilson, senior economist at research house Australian Property Monitors.
“Canberra is a good prospect: there’s always a shortage of housing,” he says.
Jason Anderson, senior economist at property research and forecasting house Macroplan, says: “Sydney and Perth are the two that will outperform in 2012 and, for Sydney, it will be the first time in years.”
Anderson says Perth’s rental market is getting tougher and with interest rates coming down, more people will seek to buy. “The equation looks quite good. A 5 per cent price growth this year is a reasonable expectation.”
“And,” he says, “we’re very optimistic about the Hunter Valley in NSW.” Unemployment is at 4 per cent, there is a very strong construction cycle starting in upper Hunter mines and in road, rail and ports. Housing shortages there are as bad as in Sydney, he says, so the Hunter is suffering Sydneyesque rental pressures. “Strong wages growth will attract people and tighten that pressure. We expect price rises of 7-8 per cent this year. The Hunter is on the cusp of a breakout. It is the standout area in NSW,” Anderson says.
L. Janusz Hooker, chief executive of LJ Hooker real estate group, says Newcastle, the Hunter hub, is a main beneficiary and, while still affordable, is under strong knock-on pressure from the Hunter’s mining boom.
What is very clear is that the closer experts are to a particular market, the more sanguine they are about it.
Wilson says Hobart and Adelaide will “move sideways for most of the year” with a slight chance of some movement in Adelaide by the end of of the calendar year, and Macroplan’s Anderson believes Adelaide is “in for a bit of a rough time for the next 12 to 18 months. There’s no point beating about the bush: it will have trouble. If Adelaide can keep house prices flat, that would be a good outcome.”
But the South Australian Property Council’s chief executive, Nathan Paine, says Adelaide is “looking pretty solid”. Housing starts are holding their long-term average and he sees the possibility of more strength with new buyers entering the market.
The Canberra-based Real Estate Institute of Australia couldn’t be more forceful in its position. “Well, despite what you’ve heard, there is no housing bubble so don’t expect to see the housing market crash this year or next year,” says REIA chief executive Amanda Lynch. “Property is a sound investment, particularly in Canberra because, despite small hurdles along the way, the ACT has higher wages than the rest of the country and a low unemployment rate,”
Wilson believes Darwin will resume its usual growth pattern and strengthen. “I wouldn’t be surprised to see double-digit growth in house prices there,” he says.
“As for Perth, it’s a no-brainer. Its housing market is still 10 per cent below where it was four years ago, so there are good bargains there but it will soon catch up to its old level. There’s $100m in infrastructure projects in the pipeline for this year; there’s corporate growth and a significant influx of labourers looking for gold, all of which is putting pressure on housing. I expect double-digit price growth in Perth by the end of the year.”
Not everyone is confident about Brisbane. Brian White, chairman of the Ray White real estate group, describes Brisbane as “subdued” and Hooker says “it’s not taking off by any means but after the big price falls there, we might at last be seeing a floor”.
Those lower prices, Hooker says, mean “there are some great bargains to be had as there are also on the Gold Coast and, to a lesser extent, the Sunshine Coast”.
Kevin Seymour, executive chairman of the Seymour Group, a Queensland development and investment company, believes the overall Queensland market will be sluggish except in mining boom towns such as Mackay, Rockhampton, Townsville and Gladstone, where he expects to see strong price growth.
UBS’s head of property analysis, John Freedman, thinks Brisbane’s outlook is constrained and that at best we will see a “mean reversion rather than a recovery”.
What all seem to agree on is Victoria.
“Melbourne? Oh dear,” says Macroplan’s Anderson. “More interest rate cuts would help but, if we don’t get them, I can see Melbourne’s house prices falling a further 5 per cent.”
Harley Dale, chief economist of the Housing Industry of Australia, believes there will be bigger declines in Melbourne than anywhere else and, according to RP Data’s senior research analyst Cameron Kusher, even rental yields in Melbourne are low.
Wilson, however, says houses around Macedon and Wood End northwest of Melbourne offer good buying now.
For JPMorgan economist Ben Jarman, a characteristic of the Australian market is poor housing starts. These fell 6.8 per cent in the September quarter last year, “the fourth significant decline in five quarters”, and he predicts more weakness to come.
This weakness in housing starts has little to do with confidence or the economy: it is largely the result of planning and regulatory complexities and costs.
According to the HIA’s Dale, “more than 40 per cent of the final cost of a new house is taxation”.
Bob Rose, chief executive of the family-run development company The Rose Group, says the situation is critical. “The NSW requirement is for 25,000 new dwellings to be built each year but we’re only building 13,000. Approvals in September per 10,000 people were 47 in NSW, 109 in Victoria and 73 in Queensland. This is crook for NSW. In new growth centres in Sydney’s west, government and council levies on each house/land package are more than $100,000, and that’s without extra huge costs if special reports are required.
“The system desperately needs review. Big listed developers might survive but I can’t see the small ones making it. And if the development industry closes down, who will build the houses?”
To sum up, with the economy comparatively solid, rates falling and housing stock in short supply, the likelihood is that prices will continue to hold or, more likely, rise.
Source : Jo Studdert of the Australian Newspaper. 14 January 2012
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