Given how interest rates dominate the economic debate in Australia, last week’s GDP figures were one of the rare cases of major economic news having next to no impact on interest rates. And yet perhaps the Reserve Bank of Australia should react, given the national accounts point to a weakening in the housing market in all states except New South Wales.
One reason the latest GDP figures won’t affect interest rates is timing. Last Tuesday, the RBA board met and decided to keep the cash rate on hold at its record low of 1.5%. The next day the GDP figures for the September quarter were released showing in seasonally adjusted terms the economy had gone backwards.
The RBA board does not meet in January, so the next time they meet will be 7 February, at which point the September GDP numbers will be referring to a period some four months previous. The December quarter GDP figures will also be only three weeks away from being released.
But while the likelihood is the RBA board will wait at least until March before acting, the September figures would certainly have piqued its interest, especially given they almost certainly render the RBA’s growth projection as too optimistic.
In its latest statement on monetary policy the RBA estimated GDP growth in 2016 would be with 2.5% to 3.5%. But to achieve even 2.5% annual growth, the December quarter would need to grow by around 1.3% – the biggest quarterly growth for nearly a decade.
And one contributor to the September quarter fall in GDP was a decline in the construction of private dwellings. While much of the blame was placed on the weather, and the erratic nature of the quarterly seasonally adjusted measure, the impact such dwelling construction is having on annual GDP growth looks to have peaked:
Now that peak would be fine, but there doesn’t seem to be much else replacing it – especially as the growth in household consumption is also falling.
But the problem for the RBA remains that its tool of cutting interest rates is very imprecise.
It is now five years since the RBA began cutting rates in November 2011. In that time there has been a veritable surge in the housing investment that has helped fuel economic growth.
But that boom has been very much on the east coast, and especially Sydney-centric.
Last week’s GDP figures showed that in the past five years private dwelling investment in NSW has grown by 60% compared to just 12% in the rest of the nation:
While the ACT has had a very strong surge in construction in the past year, NSW in the past five years has for the most part outpaced everywhere else.
So strong has been the growth of dwelling investment in NSW that while in total NSW accounts for just under a third of all such investment in Australia, it has accounted for 61% of the growth in that investment in the past five years:
And while the past five years has seen dwelling investment in NSW outpace the rest of the nation, it has for the most part at least been in sync. But over the past 12 months, NSW has split with the rest of the nation:
The difficulty for the RBA however is that in the September quarter, when Australia’s economy went backwards, it was cutting interest rates – first in May, which preceded the quarter and then again in August. And yet as the latest housing finance data released late last week shows, the number people borrowing to buy a home is going backwards:
The number of owner occupiers taking out housing loans has now been going backwards for 12 months.
But what has taken over is investor finance. After a three year massive surge of investor driven housing finance, new rules to limit such loans saw a sharp drop from the middle of last year. But since the start of this year, investors are back and borrowing at such a rate that they may soon again overtake owner-occupiers:
But it was the surge of investors entering the housing market that led to the boom in house prices – something the RBA would not wish to see repeated, and it would halt it seeking to cut rates again for fear of sparking another price boom.
Here however the RBA is currently being helped by the banks themselves. Due to some rise in funding costs and a need to adhere to the rules on limiting investor lending, banks have begun to raise the rates for investor housing loans independently of the RBA.
This might actually give the RBA room to cut rates further if it believes the lower rates will predominantly go to owner-occupiers.
But the issue for the RBA will remain – can it justify cutting rates to assist Western Australia, Tasmania, South Australia, and parts of Queensland, when the biggest housing market in the land in Sydney is already going gangbusters?
