Interest rates were once again left untouched at 4.75% when the Reserve Bank held its July meeting, which came as a surprise to many economists who had predicted an increase.
RBA Governor Glenn Stevens ascribed the decision to a number of factors: “The global economy is continuing its expansion, but the pace of growth slowed in the June quarter.”
“The supply-chain disruptions from the Japanese earthquake and the dampening effects of high commodity prices on income and spending in major countries have both contributed to the slowing", he said.
Mr Stevens also said that the recent banking and sovereign debt problems in Europe have added to the uncertainty and volatility in financial markets.
Not long after the RBA’s announcement, Michael Pascoe issued a caution in Business Day that we shouldn’t have been surprised at the RBA’s backflip.
“Yes, the RBA has pulled back from the very bullish forecast it made in early May that Australia's GDP would grow by more than 4% this calendar year, but it's only retreated to 'trend or higher’ - meaning we're still going to do better than we have averaged,” he said.
He pointed out that in May three of the four big banks' chief economists predicted an official interest rate rise in June but their forecasts proved incorrect. He then said that the forecast by Westpac this week that interest rates would be cut would also be proved wrong.
Banks Agree to Disagree
Westpac became the first major bank to predict a rate cut on July 15 when it issued its ‘Interest Rate View’. The bank’s Chief Economist, Bill Evans, said that the RBA will cut the interest rate four times in 2012 to avoid putting the brakes on a fragile economy.
‘‘While the catalyst for the first rate cut is likely to come from offshore we do not expect it to be a one off,’’ he said.
He argued that Interest rates are too high in Australia given the state of the non-mining sectors of the domestic economy and that a downward adjustment would be required to avert a damaging round of economic contraction.
‘‘We now expect a sequence of rate cuts beginning with 25 basis points in December 2011 and through 2012 totalling 100 basis points prior to a period of steady rates in 2013.”
As often happens with economists, not all of his colleagues agree with Mr Evans. The Commonwealth Bank’s Craig James told the Sunday Telegraph that the Reserve Bank will leave rates on hold for most of the rest of the year.
"If rates are going to move anywhere, it is still more likely to be up rather than down. It is going to be more a period of stability rather than anything else," he said.
In the same article the ANZ Bank's Ivan Colhoun said interest rates were still more likely to rise but had become "more of an each way bet" with some sectors of the economy performing poorly."
Differing Viewpoints on Housing Prices
Residex CEO John Edwards said in his July 18 Blog: “I can tell you that in the whole time I have been studying the market I have not seen the makings of such a perfect storm."
He commented that the June quarter numbers in some states are the worst recorded for more than 30 years, and that readers would probably have to go back to the 1960s to find worse figures.
This respected market analyst does see a flickering of brightness in the gloom: “Our star is Sydney, which is the market that generally points to the future performance of other markets across Australia...”
Tim Lawless, RP Data's national research director said the RP Data-Rismark Home Value Indices results showed that over the month of May Sydney home values remained virtually flat, recording a rise of 0.3% across the combined house and unit market.
“There are several factors that are likely to keep a firm lid on price appreciation in Sydney. We don't expect values to show a material fall; however, the likelihood that Sydney's market will slip into the red on an annual basis over the coming months remains a distinct possibility.”
Sydney buyers do seem to be managing. The auction clearance rate on Saturday, 16 July was a healthy 56%. Of 181 properties on offer, 114 were sold.
Figures from the Australian Bureau of Statistics showed a significant rise in the number of owner-occupied housing loans approved in May.
Property writer Mark Armstrong said in the Sun-Herald that the Baby Boomers, those who largely own their own homes and have low levels of household debt, may want to sell their homes but won’t let them go cheaply.
He said that Baby Boomers are in a prime position to borrow funds and often take out loans to invest for retirement using their home as security. Neighbourhoods with a high percentage of 'Boomer' residents have a kind of inbuilt property price protection.
He adds: “While there is no doubt that we are in the middle of a soft property market, by looking deeper into the underlying demographics we will find that some markets may remain a bit more robust during this period.”
Interest Rates and Housing Prices
Interest rates could go either way or even stay the same for some time. Although a rate rise is unlikely given the weak global economic conditions, the probability of a fall is equally unlikely unless there are serious economic problems in the Australian economy.
It’s therefore likely to be a very stable period of interest rates for the next few months.
Housing prices in Sydney are not as robust as they were a few months ago, but aren’t about to topple in established suburbs. Some prices will slip back towards their levels of a year ago but most analysts don’t foresee much of a decline.
The market will have slight falls in some areas but prices will remain mostly stable in suburbs within 10km of the CBD. Some rises are also possible in highly desirable areas.
Sources:
- ‘Interest rates to plunge? Don't get your hopes up,’ Michael Pascoe in Business Day, 17 July 2011
- ‘Economists reject rates drop prediction,’ ABC News, updated 17 July 2011
- ‘Westpac wrong on interest rates say other major banks,’ Gemma Jones in The Sunday Telegraph, 17 July 2011
- Statement by Glenn Stevens, Governor: ‘Monetary Policy Decision,’ Number 2011-15, 5 July 2011
- ‘Sydney still the leader of the pack,’ Tim Lawless onDomain.com, 3 July 2011
- ‘House prices to fall over next year: survey,’ Chris Zappone in Business Day, 14 July 2011
- ‘Interest rate rises loom but home prices 'won't crash,' Thomas Hunter in The Melbourne Age, 27 June 2011
- ‘Signs of Increased Buyer Activity Emerge’, Sun-Herald, Sunday 17 July 2011
- ‘Demographics tell a story of robust markets’, Sun Herald, Sunday 17 July 2011
Philip Keeffe - Phil Keeffe is an Australian journalist originally from California who has lived in Sydney since 1968. His communications background ...
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