Rate cut and unemployment data point to housing recovery

As I have argued all year, the most interest rate-sensitive sector of the economy, Aussie housing, is a great “hedge” against adversity (or the perception of such, which, with enough spruiking, can sometimes overwhelm reality). 

In 2010 we were bearish on 2011 house prices based on our belief that the RBA would be compelled to raise rates a couple of times (we actually got most of those hikes in November once you include the bank top-ups). 

On the assumption that the global economy tracked to trend, we were not projecting a genuine rebound in housing activity until mid 2012, by which time we felt the RBA would have completed this monetary policy cycle. 

However, we have consistently said that if the “Chindia” story blew up, or if we get a GFC Mark II, the RBA will have no choice but to slash rates. It was, after all, expecting to lift them on the basis of a once-in-140-year terms of trade boom. 

And contrary to the conventional (nay simplified) wisdom that a GFC Mark II is going to be bad for “everything”, it is possibly a very good outcome for Australia’s highly interest rate-sensitive housing market. 

For several months we have seen signs that the market was starting to “base” after recording a price correction of 3% to 4%. This was confirmed with yesterday’s housing finance data for the month of September, which validated partial indicators that first-time buyers are at the vanguard of a market rebound, accounting 16.4% of all new home loans. This was the highest first-time buyer participation we have seen in over a year (or since May 2010). 

What is more interesting is the sustained recovery in housing finance volumes. In the month of September, the number of seasonally adjusted home loans approved for the purchase of established homes (which cover the vast bulk of sales) rose to its highest level since way back in the boom-time conditions of November 2009. 

Different economists have spun this and the consumer confidence data in different ways to suit their forecasts. For example, some “talk the data down” by quoting the “value” of loans approved as opposed to the actual “number”. Since values are determined by a range of factors (eg, the actual number, the type of borrower, the price of the home, and the loan-to-value ratio), they are a much less precise signal on housing activity. 

As the chart below shows, the crucial take-away is that some time before the RBA had even decided to cut interest rates, there was unambiguous evidence that housing credit, which is a critical driver of housing demand and ultimately prices, was on the way up.

Click to enlarge

There is ordinarily a multi-month lag between the housing finance flows and actual house prices. The impact of the RBA’s November rate cut, which I have argued is much more significant than most analysts appreciate, was also reflected in yesterday’s consumer sentiment data. 

The Westpac-Melbourne Institute survey reported that consumer confidence surged 6.3% in November to 103.4 points, which is officially above the long-term average of 100 points. No recession in sight as far as real Australians are concerned, I am afraid. 

The logic I have been belabouring of late is that for most of 2011 the average Australian family was budgeting on at least two to three future rate increases, according to Westpac-Melbourne Institute data. An extraordinary 25% to 30% of the population thought they would get slammed with four-plus hikes. 

On this basis, the RBA’s shift from talking up the prospect of tighter monetary policy to formally reducing rates in November is going to have a profound effect on community expectations. 

Families will now almost certainly be banking on stable rates, or rate cuts. The likelihood of the latter is increased by both financial market pricing, which is penciling in up to six more rate cuts by June 2012, and the “new normal” among most Aussie economists, who have switched from hawkishly predicting up to four or five hikes over 2011-12 to canvassing cuts. Indeed, some of the biggest hawks at the end of last year are today’s most vocal doves. How times change, eh! 

The banks have, for the moment, also done their part. You can get one-year fixed-rate loans for less than 6%. Three year fixed-rates are falling fast, with Suncorp promoting a 6.2% per annum product. And market variable rates are now clearly in historically discounted territory, with the likes of UBank offering a 6.39% per annum loan for select customers. 

This morning’s unemployment data also reinforces this central story. Contrary to many predictions of a rise, the unemployment rate fell from 5.3% to 5.2% with solid total employment growth of 10.1k persons during the month of October. Even more importantly, the previous month’s total employment result was actually revised up from an already strong 20.4k to 22.5k persons. 

Notwithstanding the hard economic facts that Australia’s economy is cruising along at what appears to be a comfortable trend rate of growth, the chorus of doomsayers, and the RBA’s desire to take some insurance out against the risk of a global catastrophe, will only help to solidify Australia’s housing market. 

We have, as a consequence, brought forward our mid-2012 expected recovery to the first few months of next year. And, to be clear, the further rates fall, the stronger that rebound is likely to be.

Christopher Joye is a leading financial economist and a director of Rismark International and Yellow Brick Road Funds Management. The above article is not investment advice.