Larry Schlesinger | 9 November 2012

Lower rates working their way through the economy as RBA notes improving housing market outlook

Previous cash rate cuts are starting to work their way through the economy and having "some of the expected effect" including stimulating a tentative recovery in the residential building sector, says the RBA in its November statement on Monetary Policy.

The RBA makes the point that “interest rates for borrowers are clearly below their medium-term averages" with the suggestion that global factors and commodity prices will play a key role in future cash rate decisions.

It goes on to say that while the impact of these lower rates take “some time to work through the economy, there are signs that easier conditions have been having some of the expected effects, and further effects can be expected over time”.

“At the November meeting, with the more recent positive news on the international economy and with inflation a little higher than expected, though still likely to be consistent with target over the year ahead, the Board judged that the stance of monetary policy remained appropriate, for the time being.”

The lengthy statement revealed that the sharp fall in spot prices of bulk commodities, which led to a change in the spending plans of firms in the resource sector and indicated that the peak in investment in the resource sector is likely to occur a “bit earlier and at a lower level than had previously been expected” was key reason (along with a weaker outlook for growth) for cutting the cash rate in October.

A month on and the RBA notes a number of positive developments relating to the housing sector.

“While household dwelling investment continued to decline over the first half of the year, there have been signs in recent months of a prospective improvement, partly in response to reductions in interest rates.

“Private residential building approvals, dwelling prices and auction clearance rates have all increased.

The RBA says approvals for detached houses have increased by less than total building approvals, but says "typically it can take several quarters for falls in interest rates to spur recovery in this market".

"In addition, uncertainties in Western Australia associated with the introduction of a new building approvals process are yet to be fully resolved."

Households deleveraging is also seen as a positive with the RBA noting that while “overall demand for housing finance has been broadly stable over the course of the year and many home owners are taking advantage of lower borrowing rates to pay off their loans more quickly”.

The impact of lower interest rates is recurring theme in the statement:

“Lower interest rates, rising rental yields and an improvement in conditions in the established housing market are expected to support rising dwelling investment.”

However, the RBA also notes the challenges facing the weaker parts of the two-speed economy.

“On the domestic front, the outlook for growth is sensitive to prospects for mining investment and the timing and extent of the anticipated recovery in both dwelling and business investment outside of the resource sector.

It says that investment intentions outside of the mining industry remain relatively subdued.

“The elevated level of the exchange rate, and weak housing market activity, are still weighing on the outlook for some sectors. In particular, the construction industry has shed labour as the boost from spending on government-funded projects unwinds, and activity in private building construction remains weak

“Leading indicators do, however, provide tentative signs of a recovery in residential building.”

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