The Reserve Bank of Australia decides to look away from surging house prices

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by Shaun Richards

We have an opportunity to take a look at a land which is both down under and a place where beds are burning, at least according to Midnight Oil. This is because the latest central bank to emerge blinking into the spotlight is the Reserve Bank of Australia or RBA. Here is its announcement.

  • retain the April 2024 bond as the bond for the yield target and retain the target of 10 basis points
  • continue purchasing government bonds after the completion of the current bond purchase program in early September. These purchases will be at the rate of $4 billion a week until at least mid November
  • maintain the cash rate target at 10 basis points and the interest rate on Exchange Settlement balances of zero per cent.

Perhaps they thought that announcing the interest-rate decision last would take the focus off it. A curious development in that who expects a change anyway? A sort of equivalent of an itchy collar or guilty conscience I think. Along the way they have reminded us that they also have a 0% interest-rate and I guess most of you have already figured that it of course applies to The Precious.

Exchange Settlement Accounts (ESAs) are the means by which providers of payments services settle obligations that have accrued in the clearing process.

As someone who has spent much of his career in bond markets I rather approve of starting with a bond maturity but what is taking place here is a little odd. This is because as time passes their benchmark of April 2024 is shortening as for example it is now 2 years and 9 months. For example that is below the minimum term that the Bank of England will buy ( 3 years) and also central banks have in general been lengthening the terms of their QE buying arguing that such a move increases the impact.

If you think the above is an implicit way of cutting QE there is then the issue that it has been extended until November although with around a 20% reduction in the rate of purchases. That is similar to the Bank of England.

As ever they think they can get away with contradicting themselves because the economy needs help apparently.

These measures will provide the continuing monetary support that the economy needs as it transitions from the recovery phase to the expansion phase.

But only a couple of sentences later it is apparently going great guns.

The economic recovery in Australia is stronger than earlier expected and is forecast to continue. The outlook for investment has improved and household and business balance sheets are generally in good shape.

So do all states of the economy require support these days?

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The Economy

The latter vibe continues as we note this.

National income is also being supported by the high prices for commodity exports.

That boost may well carry on if the analysis in The Conversation turns out to be accurate.

The panel expects actual living standards to be higher than the bald economic growth figures suggest.

This is because high iron ore prices boost Australians’ buying power (by boosting the Australian dollar) and boost company profits in a way that isn’t fully reflected in gross domestic product.

In recent months, the spot iron ore price has been at a record US$200 a tonne, a high the budget assumes will collapse to near US$63 by April next year as supply held up in Brazil comes back online.

The panel is expecting the iron ore price to stay high for longer than the Treasury — for at least 18 months, ending this year near a still-high US$158 a tonne.

So a windfall for Australia although they have omitted the “Dutch Disease” issue where the higher Aussie Dollar they mention deters other sectors of the economy such as manufacturing.

Another signal is going well according to the RBA.

The labour market has continued to recover faster than expected. The unemployment rate declined further to 5.1 per cent in May and more Australians have jobs than before the pandemic.

There may even be hope for some wages growth.

Job vacancies are high and more firms are reporting shortages of labour, particularly in areas affected by the closure of Australia’s international borders.

Although later it appears to think it will take quite some time.

The Bank’s central scenario for the economy is that this condition will not be met before 2024. Meeting it will require the labour market to be tight enough to generate wages growth that is materially higher than it is currently.

House Prices

The situation is in rude health from a central banking perspective.

Housing markets have continued to strengthen, with prices rising in all major markets. Housing credit growth has picked up, with strong demand from owner-occupiers, including first-home buyers. There has also been increased borrowing by investors.

Well if you will pump it up as we note that “investors” are on the case.

The final draw-downs under the Term Funding Facility were made in late June. In total, $188 billion has been drawn down under this facility, which has contributed to the Australian banking system being highly liquid. Given that the facility is providing low-cost fixed-rate funding for 3 years, it will continue to support low borrowing costs until mid 2024.

This is a type of copy cat central banking where the RBA has copied the policy which has juiced the UK housing market. Looking at the credit data there is a lot of investor activity as total mortgage credit for that category was 669 billion Dollars at the end of May as opposed to 1.258 trillion for owner-occupiers.

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Anyway here is the consequence.

CoreLogic’s monthly home price index rose 1.9 per cent in June, led by 3 per cent growth in Hobart and 2.6 per cent in Sydney.

The index rose 13.5 per cent over the past financial year just ended, with Darwin (+21pc), Hobart (+19.6pc), Canberra (+18.1pc) and regional markets (+17.7pc) leading the way.

That is the strongest annual rate of growth recorded by CoreLogic nationally since April 2004.

Inflation

Switching to the supposed target then things are in hand as long as you ignore the above.

In the central scenario, inflation in underlying terms is expected to be 1½ per cent over 2021 and 2 per cent by mid 2023. In the short term, CPI inflation is expected to rise temporarily to about 3½ per cent over the year to the June quarter because of the reversal of some COVID-19-related price reductions a year ago.

Comment

There are quite a few familar themes here as we note that even recoveries these days need support rather than the old standard of taking away the punch bowl just before the party gets really started. I think we can safely say that the housing  market has the volume turned up if not to 11 very high. This means that for central bank action we return to the prophetic words of Glenn Frey and Don Henley of The Eagles.

“Relax, ” said the night man,
“We are programmed to receive.
You can check-out any time you like,
But you can never leave! “

There is an Australian spin in the way that all roads here seem to lead to 2024. Is that a type of release valve? It looks like that at first but there is a catch. We have seen that central banks may reduce the rate at which they buy bonds under QE but they never reverse it. The one main effort by the US Federal Reserve was followed by it buying ever more. In the end central banking roads have so far ended at this destination.

Come on let’s twist again,
Like we did last summer!
Yeaaah, let’s twist again,
Like we did last year! ( Chubby Checker )

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