Philip Lowe has some high-powered backing if he leaves interest rates on hold Tuesday as widely expected. Days after the Reserve Bank of Australia governor signaled that rate cuts weren’t in the national interest amid record household debt, the securities regulator said it was looking at mortgage lending standards across the banking sector. The Organisation for Economic Co-operation & Development last week highlighted risks posed by Australian property and private debt.
Sydney house prices have soared 73 percent in the past five years, ranking it second only to Hong Kong as the world’s least affordable housing market, while Melbourne prices shot up 52 percent in response to the RBA’s multi-year easing cycle. The central bank had sought to steer economic growth away from mining investment and toward Australia’s traditional services industries led by exports of tourism and education.
“The recent periods of rate cuts — February and May 2015 and May and August 2016 — are associated with significant increases in house-price inflation,” while price growth in the intervening periods slowed significantly, said Bill Evans, Westpac Banking Corp.’s veteran chief economist. “These movements will not be lost on the governor.”
Since Lowe took the helm in September, rates have been held at a record-low 1.5 percent. That will remain the case following policy makers’ Tuesday meeting in Sydney, economists predict and money markets show. Most economists expect no change for the rest of this year.
Low rates have played a key role in Australia’s property boom, along with a decade of high population growth on the east coast and lack of house construction. Moreover, with the economy in flux amid the end of the mining investment boom, local investors turned to bricks and mortar to park cash. Overseas buyers, notably from China, also sought to store their wealth in housing Down Under — in Sydney and Melbourne in particular.
A resulting surge in household debt last week prompted Australia’s securities regulator to look at mortgage lending standards across the banking sector amid widening concern among both politicians and regulators about the foundations of the housing market.
The OECD said in a report last week the biggest threat to Australia is from a hard landing in the property market, warning it could develop into a “rout on prices and demand with significant macro-economic implications.” The Paris-based group echoed warnings Lowe himself gave to lawmakers during testimony last month: that piling up further household debt on already record-high levels could see consumption slump.
In Sydney and Melbourne, a housing construction boom teamed with state infrastructure investment and population gains have led to a lopsided national economy. Consultancy SGS Economics & Planning estimates the two cities account for more than two-thirds of the nation’s economic growth. Meanwhile, in the mining hub of Western Australia, the economy is moribund.
That means the RBA is currently setting one policy for a range of disparate economies. If the central bank could vary its rate by region, SGS reckons Sydney would be on 3.75 percent, Melbourne on 2.25 percent and Western Australia capital Perth on 0.5 percent.
The whole of Australia continues to struggle with anemic wage growth and inflation has been below the central bank’s 2 percent to 3 percent target for nine quarters. While unemployment is relatively contained at 5.7 percent, the economy isn’t creating the right sort of jobs: almost 80,000 full-time positions were lost since the start of 2016 while 185,000 part-time roles were created.
Australia’s economy still performed well in the last three months of 2016 as it bounced back from an unexpected half a percent contraction in the prior quarter. Renewed strength in iron ore and coal prices helped drive a record trade surplus in December — that seems to have emboldened Aussie households to open their wallets and spend. But that was at the expense of the savings ratio, which came in at a post-crisis low.
The fourth quarter’s 2.4 percent annual growth suggests the RBA could be on track to achieve its 3 percent forecast later this year. The caveat is that savings can’t be drawn down forever, so its debatable how strongly household spending can hold up.
“If GDP growth and underlying inflation are weaker than the RBA expects, then Lowe may have to soften his stance,” said Paul Dales, chief economist for Australia at Capital Economics. “That would especially be the case if the housing market weakened or the labor market deteriorated.”