It has been known for some time that the Australian real estate market cannot go on the way that it has been without the economy seeing effects. As the debt-to-income ratio rockets upward, there is a growing sentiment that the Reserve Bank of Australia (RBA) will have to act to arrest a weakening dollar.
This is happening at the same time as the US-China trade war, which has sapped global markets and limited emerging ones. Many world currencies have been struggling to compete against a US dollar backed by heavy stimuli from the Federal Reserve. US President Donald Trump may have criticized such moves, but this does not mean that other countries are exempt from the effects.
RBA Governor Philip Lowe said that he was happy to see the Australian dollar weaken, as this would allow a natural stimulus to take place, which in turn would help inflation sort itself out and boost the job market and wage growth. However, he may not have taken into consideration that a global slowdown came at the same time as confidence suddenly drained in the Australian real estate market.
The Australian dollar was the worst-performing currency of all developed nations in 2018, and 2019 has carried on where last year left off. This means that the average household is seeing ever-increasing levels of debt compared to the assets that it holds and the income that it receives. The longer that this carries on, the more unsustainable the situation becomes. Such indicators, when aligned with a falling housing market, are often the marker of an incoming credit crunch.
This may well mean that RBA has little choice but to welcome cash rate cuts despite saying that the next rate change was going to be up rather than down. In the face of current economic headwinds, the bank is aware that such a move would not be a positive one and would likely not have the desired effect. To avert a potential crisis later down the line, RBA will probably want to fall in with analyst expectations.
Without its intervention, world banks are forecasting grim figures for the Australian dollar. HSBC said that a 7% slide to 66 cents on the US dollar is still to come, while Rabobank estimated the AUD to hit 68 cents compared to its US counterpart before the year is out.
Rabobank Head of Asia Financial Markets Research Michael Every lambasted RBA for the fact that it ‘just sat there watching the housing bubble grow for the past couple of years.’ He said that the Australian economy is now in a ‘doom loop.’
The ominous-sounding term shows that it will be difficult for RBA to find a path that will not alienate some part of the market, although Every acknowledged that the Federal Reserve cooling on its stimulus package means that the Australian central bank can cut the cash rate without fearing that the AUD will weaken further compared to the USD.
Worrying data from RBA collected since the early 1990s suggests that the debt-to-income ratio has spiraled out of control, going from 67% three decades ago to a massive 189% now. Low interest rates and banks that did not receive tight regulation exacerbated this increase.