RBA sees housing market as subdued

The latest RBA board minutes indicate members’ view that the housing market is remaining subdued.

The minutes note growth in housing credit continued to run a little below growth in disposable income.

The Reserve Bank of Australia gives no direct sense on the future path for interest rates in the minutes for its November board meeting, although some commentators suggest diminishing odds of a December rate cut.

The RBA chose to cut the cash rate by 25 basis points to 4.5 per cent at its November board meeting, citing easing inflationary pressures and volatility on global financial markets for its decision.

The board notes preliminary estimates suggesting another small decline in nationwide house prices in September, to be about 3% to 4% lower over the year.

It says financial conditions have already been easing somewhat, with a range of lending rates edging down over the past couple of months.

“The household saving rate was forecast to remain around its current level and growth in public demand was expected to be subdued,” the minutes show.

It notes with overall credit growth remaining low, financial conditions on balance appear to remain somewhat tighter than normal, which was one of the factors that swayed board members to cut interest rates in November.

Although there had been a noticeable pick-up in building approvals in August owing to a large rise in the apartments category, the RBA deemed it was a volatile statistic from month to month.

The board members considered the significance of the inflation data that suggested that after a pick-up in underlying inflation in the first half of the year, there had been a moderation more recently, “notwithstanding ongoing large increases in utilities charges”.

CPI inflation remained above 3% on a year-ended basis, but is expected to decline significantly over the next few quarters, as prices fall for some key food products that had been affected by adverse weather earlier in the year.

The RBA notes economic activity suggests that the pace of growth in demand and output outside the resources and related sectors is a little lower than had been expected earlier in the year.

The revised staff forecasts pointed to the likelihood of overall GDP growth being close to trend over the next one to two years, and inflation being consistent with the 2% to 3% target.

The minutes note RBA staff had undertaken a review of the forecasts for domestic growth, which had been revised lower reflecting the weaker global outlook, the decline in confidence and asset prices since August, and a downward revision to the outlook for coal production.

“Over the forecast period, domestic demand was expected to grow at an annual rate of around 4%, with growth in imports substantially faster than this, owing to both the high exchange rate and the mining sector's relatively greater use of imported capital goods,” the minutes say.

“Overall GDP growth was expected to be around 3% to 3½% cent in 2012 and a little stronger in 2013.

“Correspondingly, the unemployment rate was expected to increase a little, before drifting lower again.”

The RBA notes the outlook for the resources sector remains very strong, with mining investment expected to increase to around 7% of GDP by 2013-14.

“In contrast, growth in the non-mining economy was expected to be below trend.

“The sovereign debt problems in the euro area posed the most significant risk to the growth outlook.”

The bank’s inflation forecasts have also been lowered, reflecting both the lower starting point and the modest downward revision to the forecast for output growth.

“Based on the current set of assumptions, inflation in underlying terms (excluding the effect of the carbon price) was expected to be around 2½% in 2012, and to pick up a little in 2013, but still be consistent with the inflation target.

“This general outlook for inflation was conditional on aggregate wages growth remaining at around its current pace and a pick-up in productivity growth.

“The year-ended rate of CPI inflation was expected to fall below underlying inflation in early 2012, as banana prices fell to more normal levels.

“It was then expected to increase to around 3¼% following the introduction of the price on carbon in mid-2012, before again declining,” the minutes say.