RBA did not bark, and that’s the point
Tuesday’s interest rate decision and statement from the Reserve Bank seemed unremarkable.
The markets glanced at it and moved on; there was a halfhearted attempt by some commentators to invoke a small increase in “dovishness” on the part of the governor, Philip Lowe, but it didn’t catch on and the story was soon overwhelmed by a 3 per cent drop on Wall Street that night, caused by a partial yield curve inversion in the US.
But actually, the RBA statement on Tuesday was astonishing, not for what it contained but for what it didn’t contain. Like the dog in the Sherlock Holmes story, Silver Blaze, the RBA didn’t bark.
Deputy governor Guy Debelle had a bit of a woof on Thursday night in the Q&A after his speech about the GFC to the Australian Business Economists’ dinner, saying that “decent” falls in two capital cities at once was uncharted territory and that rates could be cut if necessary.
But he also pointed out that the property correction was caused by a squeeze in the volume of loans, not an increase in their price, so not the RBA’s territory.
But the formal statement on Tuesday looked both out of date and complacent.
They had seen the CoreLogic house price data for November the day before: Sydney down 1.4 per cent and Melbourne 1 per cent, the largest monthly falls in this cycle.
So 16 months into Sydney’s housing correction and 12 months into Melbourne’s, the pace of decline for both cities is accelerating. Separately, Perth values are also back in serious decline, having failed to even register an increase while Sydney and Melbourne were booming.
The RBA’s response on Tuesday? “Conditions in the Sydney and Melbourne housing markets have continued to ease …” Wrong. For a start, 1.4 per cent in Sydney for the month is not an “ease” — it’s 16.8 per cent annualised, which is anything but. And secondly, it’s an acceleration, not a continuation of easing.
The following day, the RBA’s optimism was more decisively torpedoed by the national accounts.
Annual growth was reported
to be 2.8 per cent, which sounds OK, just, but if we reported annualised quarterly growth like most other countries, the US and China for example, the 0.3 per cent for the September would have been announced as 1.2 per cent — not OK at all.
The previous day’s RBA statement had said: “The central scenario is for GDP growth to average around 3.5 per cent over this year and next …”
What’s more, of that meagre 0.3 per cent lift in GDP in the quarter, 0.35 percentage points came from “public demand” and another 0.35 percentage points from net exports. And a lot of that increase in public demand is simply a shift of activity from the nonmeasured work of helping disabled family members to the NDIS, which is in the GDP.
To be clear: a large amount of disability services are moving into GDP for the first time.
The private domestic economy — business investment and consumption — has collapsed, and is in recession.
That’s further reinforced by the 0.1 per cent decline in per capita GDP in the quarter.
And we may be only part-way through a long, and very big hous- ing correction that will further shrink consumption — through the wealth effect — as well as business investment — through declining residential construction.
There will be no recession in Australia as long as China’s economy holds up and state governments continue to spend to catch up with population growth, but it’s certainly not out of the question for there to be a sort of domestic recession of investment and consumption next year.
It depends on what happens to the housing market.
At this point, I should probably make a confession: I wrote a few times during the boom that I didn’t think it was a bubble that would result in a big crash because house prices were supported by population growth and low interest rates.
That was, and remains, perfectly true, but Sydney median’s 1.4 per cent fall in the 16th month of the correction is starting to be suggestive of something a bit on the bubble-ish side.
It’s true that Sydney prices rose 75 per cent and have fallen 10 per cent, so everyone’s still well ahead and shouldn’t complain too much, except for those who bought late, of which there are quite a few.
And if you think that’s it for the decline, you’re not paying atten- tion (with the RBA) and second, the rise is a distant memory, and the decline has its own impact on wealth and consumer spending, no matter what the rise that preceded it was.
With any luck, I’ll be wrong again and there will now be a bounce in house prices across the nation, and they go back to becoming unaffordable.
But here’s the problem: even if the RBA came over all “dovish” and, as a billowing group of economists are now predicting, actually cut interest rates next year in an attempt to rescue the housing market and the domestic economy, it probably wouldn’t work.
That’s because, as Guy Debelle said on Thursday, the correction has been brought on by an APRAinduced credit squeeze, not a rate hike.
Obviously, a rate cut next year — even a shift in RBA rhetoric towards an “easing bias” — would be a big deal, and wouldn’t be lost on property buyers.
But would it produce a forest of raised arms at auctions? Unlikely.
The problem is credit volume, not price, and that’s in the hands of APRA, and, more to the point, Ken Hayne.
Reserve Bank deputy governor Guy Debelle