Early this morning the day was set in in central banking terms by the Reserve Bank of Australia who exhibited one of my main themes. So let us take a trip to a land down under where the RBA opens its quarterly statement in upbeat fashion.
Strong global growth is expected this year and
next as the global economy recovers from the
pandemic.
This is especially relevant to Australia with its large commodity resources sector which is always likely to benefit from such a pick-up.
Globally, there has been a swift recovery in
international trade as people switched their
spending away from services and towards
goods. This has been positive for export oriented economies including China and some
economies in east Asia. It has also boosted
demand for many commodities
In case they had not been absolutely clear it gets rammed home here.
The price of iron ore has increased to be close to its historical peak a decade ago, reflecting strong demand from Chinese steel producers.
Which is really rather convenient if you have lots of it.
Australia has plentiful supplies of natural resources, including the second largest accessible reserves of iron ore in the world, the fifth largest reserves of coal and significant gas resources.
Thus you will not be surprised to read this.
GDP growth was faster than anticipated in the
December quarter and is expected to have
remained solid in the March quarter. GDP
growth is now forecast to be 4¾ per cent over
2021 and 3½ per cent over 2022.
There are two further contexts to this and the first is becoming a central banking standard.
Since the previous Statement, the starting point for the
forecasts has been revised higher and the
outlook further out has strengthened.
Those words were not exactly the same as those from the Bank of England yesterday but the message rhymed. The next context is that for Australia this was a one-year dip.
GDP is now expected to have reached its pre-pandemic level in the March quarter 2021 and there were more people employed in March than before the pandemic.
So Australia is now moving ahead and expected to do so quickly.
What about the lost ground?
The level of GDP is still expected to remain
a little below that forecast before the pandemic,
mostly due to lower population growth; in per
capita terms, GDP is expected to be on a higher
trajectory.
The lower population growth seems to be another pandemic inspired trend as I noted reports of a lower birth-rate in the US earlier this week. But we can move on with the theme that Australia is right back where it started from and expected to grow strongly.
House Prices
These are hard to ignore even if the RBA might like too. Although they do like an occasional reference.
wealth effects from higher housing prices
They seem keen on higher house prices.
If the expected growth in household wealth fails to materialise, consumption growth over the forecast period could follow a lower path.
Accordingly they seem rather pleased about this.
Housing prices are rising in all major markets. Prices in Sydney and Melbourne have now surpassed their earlier peaks, following a period where they lagged the recovery in the smaller cities and regional areas. Price increases
have been strongest for detached houses and higher-priced properties.
Yesterday brought news via Yahoo to gladden any central bankers heart.
“The Australian dwelling market has reached fresh record highs for the past four months, but the end of April marked the first time the total value of Australian housing broke the $8 trillion dollar mark,” said CoreLogic head of research Eliza Owen.
The catch is that any first-time buyers will be shaking their heads at this part of it.
In the three months to April, house prices rose by 6.8 across the country, the fastest quarterly growth rate since December 1988.
Last month, dwelling values rose by 1.8 per cent, and in March house prices rose by 2.8 per cent, the fastest monthly pace seen in 32 years.
Meanwhile the RBA only seems to be worried about the banks as The Precious! The Precious! echoes from its thoughts below.
In this environment of strong demand for housing, rising prices and low interest rates, it is important that lending standards are maintained. The Bank will be monitoring trends in borrowing closely.
It is almost as if they have amnesia about the reductions in lending standards allowed by the Aussie Prudential Regulation Authority. Of course that was something of a U-Turn on the Royal Commission which was supposed to have have tightened things up. Regular readers will recall that falls in house prices led to the usual response of lower interest-rates and lower standards. This is a road which confirms my view about macroprudential policies for mortgage lending and house prices. You see Billy Ocean was kind of right.
When the going gets tough
The tough get going
In fact when the going gets tough we see the policies abandoned as we have seen here as I pointed out on the 22nd of September 2015.
Meanwhile we are promised that the modern cure-all will fix this as macroprudential policies are applied. That will only convince those with little or no knowledge of economic history.
In fact if we skip forwards just under three years to September 4th 2018 I predicted how the RBA would respond to fears of a house price fall.
Much more of that and the RBA could either cut interest-rates further or introduce some credit easing of the Funding for Lending Scheme style. Would that mean one more rally for the housing market against the consensus? Well it did in the UK as we move into watch this space territory.
Actually in the pandemic they did both and they had obviously spotted what credit easing did for house prices in the UK.
Banks have drawn $102 billion under the facility so far and a further $98 billion is currently available. Given the facility provides funding for 3 years, it will continue to
help keep funding costs in Australia low until
mid 2024.
Funding costs are the new proxy for mortgage interest-rates.
Number Crunching
All this means that the housing market situation has in fact got bigger and therefore is a bubble even less likely to be pricked.
The new $8.1 trillion figure makes Aussie real estate the number one pillar of Australian wealth, the report said.
“This puts Australian residential property at around four times the size of Australian GDP, and around $1 trillion more than the combined value of the ASX, superannuation and commercial real estate stock combined,” Owen added.
The Australian superannuation industry is worth $3 trillion, less than half of Australian property, while the ASX is worth $2.7 trillion. Commercial real estate is worth less than $1 billion. ( Yahoo)
As ever take this as a broad brush as such numbers use marginal prices for an overall concept.
Comment
My theme has been reinforced by this in the statement.In spite of the improvement in the economic outlook and Australia getting back to pre pandemic levels and surging house prices we are told this and the emphasis is mone..
It will not increase the cash rate until actual inflation is
sustainably within the 2 to 3 per cent target
range. For this to occur, the labour market will
need to be tight enough to generate wages
growth that is materially higher than it is
currently. This is unlikely to be until 2024 at the
earliest.
Meanwhile if we look back just over a year to the 19th of March 2020 we saw this.
A reduction in the cash rate target to 0.25 per cent……..A target for the yield on 3-year Australian Government bonds of around 0.25 per cent…….A term funding facility for the banking system,
I am not sure how much clearer the asymmetry could be. Or if you prefer they are saying it will be emergency conditions for the economy of Australia until 2024 at the earliest?