20th October 2021
“Education is the most powerful weapon that you can use to change the world” – Nelson Mandela
Australia’s housing markets are again outperforming expectations. Prices have continued to post strong gains despite recent extended lockdowns in NSW, Victoria and the ACT. Even in the most heavily affected markets of Sydney, Melbourne and Canberra, price growth has sustained a strong double–digit annual pace. With reopening in sight, dampening effects of lockdowns will now drop out of the picture. As always there are many moving parts to the price outlook. The main ones relate to affordability and policy tightening by both the Australian Prudential Regulatory Authority (APRA) and the RBA.
That ‘policy trigger’ for a slowdown is now coming into play. Last week’s move by APRA – lifting the buffer rate applied to loan serviceability assessments from 2.5% to 3% – marks the first step in what is expected to be an incremental tightening in ‘macro–prudential’ policy (MPP) aimed at restraining credit growth and housing market activity. The shift on MPP has come a little earlier than expected – before the full scale of the ‘delta’ shock has been confirmed and ahead of reopening, signalling a degree of urgency.
The housing market is certainly causing some concern for the RBA and certainly throwing into question when the next potential rate hike could be. Westpac expects the RBA to achieve its key policy objectives – full employment, a lift in wages growth and inflation back at the middle of the 2–3% target band – by the end of next year, setting the scene for the beginning of an official interest rate tightening cycle in 2023. This is earlier than the Bank itself currently expects, with the RBA Governor indicating that the preconditions for interest rate increases are unlikely to be in place before 2024. That said the RBA’s view of no tightening until 2024 will help sustain the housing market in the short term.
The outlook is now focusing on investor confidence post the re-opening of state economies following rapidly increasing vaccination levels. Beginning with Australia’s NAB business survey. In mid–to–late September when the survey was taken, the end of lockdown was in sight for NSW and Victoria thanks to rapid progress with vaccination. This resulted in confidence surging 19pts to +13 nationally – a reading well above the long–run average. In NSW specifically, confidence surged 42pts to +27, while in Victoria (where the re–opening is later and the trajectory of cases more threatening) confidence gained ‘only’ 16pts to +5.
In terms of employment, following the release of the September labour force data, the loss of jobs in the month was a little less than anticipated by the market (–138k actual against –150k consensus), continuing the run of outperformance through the pandemic. Despite the loss of jobs, the unemployment rate barely moved (up 0.1ppt to 4.6%) thanks to a 0.7ppt fall in participation. This goes towards the RBA’s decision-making on future rate hikes as stated above.
Given Australia tends to take its lead from the US it’s important to keep an eye on developments globally. With US inflation currently in check as evidenced by the release of the September CPI and PPI, the language being used by the FOMC is certainly indicating a start to tapering later this year with an expected end date of around mid-2022. If so, this will signal a move towards monetary policy normalisation.
The key takes away this week, much like previous weeks, is that central banks around the world are feeling increasingly confident that economies are on a firm enough footing for stimulatory measures to start winding down. As far as Australia is concerned, the RBA remains adamant that there will be no move until 2024 and, if we look at the 10 Year Government Bond which is currently yielding approx. 1.7% the increases will be cautious and mild.
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