Sydney home sales activity hits 17-year low

Aussie housing wealth hits 2-year low

Home prices; Consumer sentiment; Reserve Bank Board minutes & speech

Home prices: The Bureau of Statistics reports that Australian home prices fell by 3.0 per cent in the March quarter to stand 7.4 per cent lower over the year. The number of established house and attached home transfers in Sydney fell to 12,161 in the March quarter – the lowest level since March 2002.

Consumer confidence: The weekly ANZ-Roy Morgan consumer confidence rating fell by 0.3 per cent – the third successive weekly decline – to 114.2 points. Consumer sentiment is slightly below the average of 114.4 points held since 2014, but remains above the longer term average of 113.1 points since 1990.

Reserve Bank: Minutes of the June 4 Reserve Bank Board meeting were released. The Board reduced the cash rate by 25 basis points to a record low of 1.25 per cent, effective June 5 and said, “Given the amount of spare capacity in the labour market and the economy more broadly, members agreed that it was more likely than not that a further easing in monetary policy would be appropriate in the period ahead.”

Speech from Reserve Bank official: Reserve Bank Head of Financial Stability, Jonathan Kearns, delivered a speech: “Understanding Rising Housing Loan Arrears” at the 2019 Property Leaders’ Summit, Canberra.

Home price data is important for retailers, especially those focussed on consumer durables. The consumer confidence figures have implications for retailers, and other consumer-focussed businesses. The Reserve Bank Board minutes and speeches provide guidance on interest rate settings.

What does it all mean?

• The Reserve Bank released its monetary policy Board meeting minutes today, having cut the cash rate by 25 basis points to a record low of 1.25 per cent earlier this month – the first reduction since August 2016.

• And it appears that interest rates are likely to be reduced even further. In fact, the commentary gave observers an inkling of what to expect in Governor Philip Lowe’s much-anticipated speech on the labour market on Thursday.

• Policy makers said, “Given the amount of spare capacity in the labour market and the economy more broadly, members agreed that it was more likely than not that a further easing in monetary policy would be appropriate in the period ahead.”

• But the Reserve Bank again reiterated that monetary policy cannot do the heavy lifting entirely to spur growth and inflation, saying “They also recognised, however, that lower interest rates were not the only policy option available to assist in lowering the rate of unemployment, consistent with the medium-term inflation target.” In other words, the onus is on the re-elected Morrison government to ease fiscal policy further, through planned tax cuts and additional infrastructure spending. And structural reforms are needed to lift productivity growth and to boost business hiring and investment.

• The negative wealth effect from falling property prices is most acute in Sydney and Melbourne. In fact, according to Bureau of Statistics data, the number of transfers of established houses and attached dwellings in Sydney has fallen to the lowest since records began in March 2002.

• Consumer confidence drifted lower last week. Sentiment has softened so far in June after the post-election bounce. The fall in the value of the Aussie dollar last week likely weighed on sentiment in the lead up to the July school holidays – especially for those going to the Northern Hemisphere for the summer. And the Aussie dollar fell to near US68.40 cents today – the lowest level since January 2016 (excluding the January 3 2019 ‘flash crash’). Expectations for further Reserve Bank interest rate cuts are weighing on the currency.

What do the figures show?

Consumer Sentiment

• The weekly ANZ-Roy Morgan consumer confidence rating fell by 0.3 per cent – the third successive weekly decline – to 114.2 points. Consumer sentiment is slightly below the average of 114.4 points held since 2014, but remains above the longer term average of 113.1 points since 1990.

• Three out of the five major components of the index fell last week:

The estimate of family finances compared with a year ago was up from +2.4 points to +6.4 points;

The estimate of family finances over the next year was up from +23.6 points to +23.9 points;

Economic conditions over the next 12 months was down from +4.0 points to +1.6 points;

Economic conditions over the next 5 years was down from +13.1 points to +11.0 points;

The measure of whether it was a good time to buy a major household item was down from +29.8 points to +28.2 points.

• The measure of inflation expectations rose from 3.6 per cent to 4.0 per cent.

Residential property prices

• The Bureau of Statistics (ABS) has released its Residential Property Price indexes for the March quarter. The ABS noted:

• “The price index for residential properties for the weighted average of the eight capital cities fell 3.0 per cent in the March quarter 2019. The index fell 7.4 per cent through the year to the March quarter 2019.”

• “The capital city residential property price indexes fell in Sydney (-3.9 per cent), Melbourne (-3.8 per cent), Brisbane (-1.5 per cent), Perth (-1.1 per cent), Canberra (-0.9 per cent), Darwin (-1.8 per cent), Adelaide (-0.2 per cent) and Hobart (-0.4 per cent).”

• “Annually, residential property prices fell in Sydney (-10.3 per cent), Melbourne (-9.4 per cent), Darwin (-4.2 per cent), Perth (-2.7 per cent) and Brisbane (-1.3 per cent), rose in Hobart (+4.6 per cent) and Adelaide (+0.8 per cent) and was flat (0.0 per cent) in Canberra.”

• “The total value of residential dwellings in Australia was $6,564,377.3m at the end of the March quarter 2019, falling $172,749.1m over the quarter.” (The decline was 2.6 per cent).

• “The mean price of residential dwellings fell $19,400 to $636,900 and the number of residential dwellings rose by 42,900 to 10,307,600 in the March quarter 2019.”

• CommSec estimates that the number of people per home was steady at 2.45 in the March quarter.

• The value of all dwellings in Australia in the March quarter was 5.7 per cent lower than a year ago. Over the year, the value of homes was higher in Tasmania (up 4.6 per cent); South Australia (up 2.5 per cent); ACT (up 1.5 per cent) and Queensland (up 0.1 per cent). But home values were lower in NSW (down 8.6 per cent); Victoria (down 7.7 per cent); Western Australia (down 3.5 per cent); Northern Territory (down 2.5 per cent).

• The number of all homes in Australia rose by 42,900 in the March quarter and rose by 195,900 over the year.

Reserve Bank June Board minutes:

• The case for lower interest rates: “Members also observed that a lower level of interest rates would stimulate activity and thereby improve the resilience of the Australian economy to any future adverse shocks.”

• Economic and inflation outlook: “While the Bank’s central forecast scenario for growth and inflation was unchanged, the accumulation of data on inflation and labour market conditions over recent months had led members to revise their assessment of the extent of inflationary pressure in the economy and, relatedly, the extent of spare capacity in the Australian labour market.”

• Uncertain outlook and forecasts could change: “Members continued to recognise that there were risks to the forecasts for growth and inflation in both directions. However, given the extent of spare capacity in the economy and the subdued inflationary pressures, they judged there was a low likelihood of a decline in interest rates resulting in an unexpectedly strong pick-up in inflation.”

• Jobs market outlook: “Forward-looking indicators of labour demand pointed to a moderation in employment growth in the near term, to around the rate of growth in the working-age population. Measures of job advertisements had declined over recent months. Employment intentions reported by the Bank’s business liaison contacts had been lower than in mid-2018, but these intentions were still generally positive.”

• Labour market spare capacity and full employment: “On a number of measures, it was apparent that the labour market still had significant spare capacity. The main approach to measuring spare capacity is to compare the current unemployment rate with an estimate of the unemployment rate associated with full employment, which is the rate of unemployment consistent with stable inflation. The Bank’s estimate of this unemployment rate had declined gradually over recent years, to be around 4½ per cent currently.”

• Household incomes and spending: “The overall net effect of lower interest rates was nevertheless expected to boost aggregate household disposable income and thus spending capacity.”

• Housing outlook and household debt: “Housing prices had continued to decline in Sydney and Melbourne during May, although the pace of decline had eased from earlier in the year…While it remained too early to determine the overall effects [of recent policy changes], auction clearance rates had increased noticeably in Sydney the weekend following these developments.” And, “members judged that a decline in interest rates was unlikely to encourage a material pick-up in borrowing by households that would add to medium-term risks in the economy.”

• Business lending: “The pace of growth in business lending had slowed in recent months, with lending to large businesses continuing to be the sole source of growth. Lending to small businesses had declined over the preceding year.”

• Global trade: “The US–China trade dispute had escalated in May, intensifying the downside risk posed to the global economic outlook from this source.”

• Rate cut decision: “Taking into account all the available information, the Board decided that it was appropriate to lower the cash rate by 25 basis points at this meeting. A lower level of the cash rate would assist in reducing spare capacity in the labour market, providing more Australians with jobs and greater confidence that inflation will return to be comfortably within the medium-term target range in the period ahead.”

• Rates outlook hinges on the job market: “..Members agreed that, in assessing whether further monetary easing was appropriate, developments in the labour market would be particularly important.”

Reserve Bank speech: “Understanding Rising Housing Loan Arrears”:

• Reserve Bank Head of Financial Stability, Dr Jonathan Kearns, gave a speech: “Understanding Rising Housing Loan Arrears” at the 2019 Property Leaders’ Summit in Canberra. In short, Dr Kearns said that Aussie mortgage arrears have increased, potentially due to weaker housing market conditions, weak income growth and tighter bank lending standards. That said, Dr Kearns said that arrears still remain below levels posing a risk to the financial system or to households.

• On rising mortgage arrears and financial stability risks: Dr Kearns said, “the share of banks’ housing loans in arrears is now back around the level reached in 2010, the highest it has been for many years. But arrears are still well below the level reached in the early 1990s recession.” And, “housing arrears have risen but by no means to a level that poses a risk to financial stability.”

• On why mortgage arrears have risen: “Weak income growth, housing price falls and rising unemployment in some areas have all contributed. But they have not acted alone, interacting with earlier weaker lending standards, and the more recent tightening in lending standards.”, said Dr Kearns.

• On rising arrears in the mining states: “…the unemployment rate has increased and income growth slowed in Western Australia and parts of Queensland with the end of the mining boom. These areas have seen larger increases in arrears. In Western Australia the arrears rate is now around double the rate in the rest of the country.”, according to Dr Kearns.

• On tighter bank lending standards: Dr Kearns said, “In Australia there has been a significant tightening of housing lending standards by the regulators of banks and other lenders, in earnest from around 2014… tighter lending standards should lead to lower arrears but this can take time to show up.”

• On the outlook for mortgage arrears and household financial stress: “…while the economic outlook remains reasonable and household income growth is expected to pick up, the influence of at least some other drivers may not reverse course sharply in the near future, and so the arrears rate could continue to edge higher for a bit longer. But with overall strong lending standards, so long as unemployment remains low, arrears rates should not rise to levels that pose a risk to the financial system or cause great harm to the household sector.”, said Dr Kearns.
What is the importance of the economic data?

• The ANZ/Roy Morgan weekly survey of consumer confidence closely tracks the monthly Westpac/Melbourne Institute consumer sentiment index but the former measure is a timelier assessment of consumer attitudes and is now closely tracked by the Reserve Bank.

• The Australian Bureau of Statistics (ABS) provides quarterly data on residential prices. The figures provide further perspectives on the state of the housing purchase sector.

• The Reserve Bank releases minutes of its monthly Board meeting a fortnight after the event. The minutes give a guide to Reserve Bank thinking on interest rate settings.

What are the implications for interest rates and investors?

• Australia’s stellar run of jobs growth over the past 2½ years has lost momentum in recent months. Unemployment has edged up and employment growth appears likely to moderate if weaker job vacancies data is any guide.

• The Reserve Bank is now targeting a jobless rate of 4.5 per cent to lift economic growth and stoke inflation. Of course, the task has been complicated by the tumultuous global trade backdrop.

• But Aussies are wanting to work more hours (as represented by higher underemployment) and have been increasingly encouraged to enter or stay in the workforce (participation rate is at record highs), implying that spare capacity in the labour market has risen. Inflation has been subdued as a result.

• CommSec, therefore, expects at least another rate cut in August.

published by Ryan Felsman, Senior Economist, CommSec