Housing Now Easing Ahead Of Rates Meeting

Sydney, Aug 5, 2008 (ABN Newswire) - The Reserve Bank board meets today and is not expected to cut interest rates, despite claims by some commentators that the economy is approaching "stall speed" to quote a commentary yesterday by brokers Goldman Sachs JBWere.



Yesterday's house price index figures for the June quarter and 2007-08 show that house prices are on the whole slowing, but there is still a bit of strength in parts of Sydney, Brisbane and Adelaide and particular.

The most interesting figure was the big drop in the quarter in Perth which nicely rebuts all those claims from some who claim there is a two speed economy in this country with resource-rich Queensland and Western Australia doing a lot better than slower NSW and Victoria.

Perth had the biggest fall of the major cities in the index: down 2.4% in the three months, while last week's retail sales figures show a sharp fall in the west, compared to more moderate declines in sales elsewhere.

Goldman Sachs JBWere said in a preview yesterday that it didn't see "a precipitous fall" in house prices as being likely because "longer-run supply-demand fundamentals remain generally supportive" of solid prices.

But based on last week's flow of poor news for the economy Goldman Sachs' economists now viewed the economy as approaching "stall speed" with a rate cut to happen by the end of the year.

"We have now formally changed our interest rate forecasts. Over the past 12 months our forecasts have called for the commencement of the RBA rate cutting phase to occur in 2Q09 with 75bp of cuts by end-09. We now expect the RBA to commence cutting rates in November 2008 and expect 100bp of easing by end-09.

"A debilitating mixture of household and financial sector deleveraging resulting in sharply slowing credit growth, record real oil prices, contractionary fiscal settings and the tightest level of financial conditions since the early 1990s recession have coagulated into a recessed retail environment and a slump in confidence which is now visiting levels only witnessed during recession periods.

"With the employment market likely to weaken materially over the 2H08 the RBA will need to address the crisis of confidence to avoid a more pernicious outcome for the economy.

"The economy is still likely to skirt around a technical recession, thanks in part to an anticipated recovery in farm production, but the pace of deceleration has likely unnerved the RBA and the risk of a hard landing remains high (approx 40%).

"The economy already appears to be operating at close to stall speed."

Macquarie Bank interest rate strategist, Rory Robertson said in a commentary after the release of the house price index figures and the monthly ANZ job ads series that "It now is obvious to all almost everyone that extremely tight financial conditions are bringing the Australian economy to a screeching halt."

He wrote yesterday: "Today's latest weak ANZ job-ads reading adds weight to the story that the RBA is likely to cut its cash rate from 7.25% in the next couple of months."

"ANZ newspaper job ads fell by a further 5% in July, to be down by one-quarter since December.



"Importantly, the developing weakness in labour demand - likely to become clearer in the official jobs data over coming months - is most apparent in the former-boom state of Queensland (job ads down by almost one-third), with its resource-rich sister-state Western Australia not far behind (job ads down by about one-quarter).

"As I wrote on Friday, an RBA rate cut this week cannot be ruled out. If nothing happens - beyond the RBA publishing a dovish post-meeting statement - a 50bp rate cut in September will seem increasingly likely"

For the first time in three years, Australian house prices have started falling officially, according to the Australian Bureau of Statistics: the fall is not uniform, according to its latest home price index for the June quarter, but it is gathering pace.

Booming Perth and Melbourne saw falls, but there was a surprise small rise in Sydney (which is supposed to be suffering big falls across most suburbs) while Queensland house prices and those in Darwin and Adelaide again rose.

And it is quite likely the drop will become more pronounced as revisions happen in earlier months: already the sharp 1.1% rise in the March quarter, compared to the December quarter, has been slashed (as many economists suggested it might) to a rise of 0.4%.

It's now clear that house prices have been easing since the start of the year, and possibly beyond.

That restated 0.4% rise in the March quarter and the 0.3% fall in the June quarter, compared to March, left the Index 8.2% higher in the year to June, according to the initial estimate of a 13.8% rise in the year to March.

That March year rise was cut to 13.2% by the ABS, which according to some economists is still too high.

The ABS said that "Preliminary estimates show the price index for established houses for the weighted average of the eight capital cities decreased –0.3% in the June quarter 2008."

That was much less, around a third under the 1% drop expected by the market and most economists.

Private price surveys have suggested that prices in most capital city markets are falling, but that's not how the ABS reported it (the Index is for a quarter, not the latest month)

"The capital city indexes rose in Darwin (+1.9%), Brisbane (+0.6%), Adelaide (+0.4%) and Sydney (+0.3%), and fell in Perth (–2.4%), Hobart (–2.0%), Canberra (–1.4%) and Melbourne (–0.3%).

"The movement in the preliminary established house price index between December quarter 2007 and March quarter 2008 has been revised from an estimated increase of 1.1% to an increase of 0.4%.

"Over the year to June quarter 2008, preliminary estimates show that the price index for established houses for the weighted average of the eight capital cities rose 8.2%.

"Annually, house prices rose in Adelaide (+16.2%), Melbourne (+14.1%), Brisbane (+14.0%), Canberra (+7.2%), Darwin (+7.0%), Sydney (+4.4%) and Hobart (+3.0%) and fell in Perth (–0.9%).

"The movement in the preliminary established house price index between March quarters 2007 and 2008 has been revised from an estimated increase of 13.8% to an increase of 13.2%."

The news ads to the slowdown in building approvals in June and the slump in retail sales.

But despite some commentators warning of a big fall in house prices that is unlikely to happen. In the 2008 financial year just over 156,000 new homes and apartments and units were approved, compared to annual demand of 180,000 or more (which is estimated by Federal treasury to be rising to around 200,000 by 2010).

And adding to this impression of an accelerating slowdown, the monthly ANZ job ads series shows the annual rate of jobs growth fell from 6.2% in June to 5.5% in July.

The ANZ said that the total number of jobs advertised in major metropolitan newspapers and on the internet fell by a seasonally adjusted 0.3% in July to a weekly average of 261,936 per week. Newspapers were again weak, the internet steady.

"This follows a 3.0% decrease in June. The total number of advertisements in July was 5.5% higher than 12 months ago.

"Looking at the different channels for advertising jobs, the number of job advertisements in major metropolitan newspapers decreased by 5.1% in July to an average of 15,739 per week.

"This followed a 3.5% decrease in June. Newspaper job advertisements are now 21.7% lower than in July 2007.

"The fall in newspaper job advertisements in July was driven by decreases in South Australia (-9.7%), Victoria (-8.6%), Western Australia (-6.6%), Queensland (-5.2%), New South Wales (-2.0%), and the Northern Territory (-1.4%). In contrast, Tasmania (+1.0%) and the ACT (+4.2%) both had solid gains in newspaper job advertisements.

"The number of internet job advertisements was stable at an average of 246,197 per week in July up slightly from an average of 246,112 in June.

"In trend terms, internet job advertisements continued to fall by a modest 0.5% in July, although they remain 8.8% higher than a year ago."

The ANZ Head of Australian Economics Warren Hogan said in a statement with the figures that "Total job advertisements continued to weaken in July largely because of 5.1% decline in newspaper advertisements.

"Internet advertisements were unchanged in July and are 7.9% above year ago levels.

"The overall trend in job advertisements continues to weaken, indicative of a softening in hiring intentions across Australia in 2008.

"The level of job advertisements remains at high levels, particularly internet ads, and in July the overall rate of decline has slowed.

"However, recent trends in job advertisements suggest that we will see an easing of employment growth in coming quarters, consistent with the slowing in domestic economic conditions in Australia over the first half of 2008.

"On this basis we expect to see a gradual drift up in the unemployment rate over the year ahead. ANZ is forecasting unemployment to be around 4.9% by June 2009."


 

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