2017 will bring financial conditions in Australian mortgage and housing markets never seen before. The rules of the game have changed and so will the results. The future of the mortgage and housing markets in 2017 may appear uncertain but as we have now entered an era of rising interest rates in the US, a
Australian interest rates are set by the Reserve Bank of Australia, an independent body established in 1959. It is guided by an inflation targeting regime that seeks price stability in the 2-3% consumer price index band. The RBA originally also governed prudential policy but following several large scandals and bankruptcies in the late 1990s that role was separated into a discrete entity titled the Australian Prudential Regulation Authority.
The RBA is widely well-regarded despite a recent history of buried corruption allegations and a board of business rent seekers that, in more ethical nations, would not have their hands anywhere near monetary policy levers.
In 1990, Australian interest rates were set at 17.5%. But during the Great Moderation, interest rates consistently fell alongside inflation and oscillated in a band between 1.5% and 7.5%.
Owing to an endowment of resources that proved very attractive to China during the Global Financial Crisis, Australian interest rates did not fall to the lows experienced in other developed markets. Indeed, Australia was the first developed market to raise interest after the crisis though it has subsequently had to lower them again as the commodity boom subsided.
During the 2000s, Australian interest rates began to be influenced by external economic pressures much more than previously. This process was driven by the huge offshore borrowing of Australia’s big four banks in wholesale markets. As their offshore liabilities ballooned, the banks were increasingly exposed to the vicissitudes of far flung markets and investors. This reached a head in the global financial crisis of 2008 when banks faced much higher demands from offshore investors for better risk-adjusted returns, forcing them to break with the Australian cash rate in setting local interest rates.
Ever since, Australian bank have regularly adjusted lending and deposit interest rates unilaterally and independently around the cash rate set by the RBA. These interest rates moves were a constant source of political friction as politicians sought to protect the Australian property bubble.
In 2015, Australian interest rate policy was forced to return to a defacto shared responsibility arrangement between the RBA and APRA. With the lowest interest rates in fifty years, the Australian property bubble inflated to new dimensions even as a global yield trade drove up the value of the Australian dollar, threatening economic growth. Eventually the solution found was to apply macroprudential policy to some mortgage lending so that interest rates could be lowered to take pressure off the currency.
MacroBusiness was the most accurate forecaster on Australia interest rates in the market from 2011 forward. It predicted both the turn in rates downwards in 2011 and has had the most dovish outlook ever since. It also lead the debate around, and implementation of, macroprudential tools in 2014. MacroBusiness covers all apposite data and wider analysis of these issues daily.
Cross posted from Digital Finance Analytics by Peter North We have updated our analysis of how sensitive households with an owner occupied mortgage are to an interest rate rise, using data from our household surveys. This is important because we now expect mortgage rates to rise over the next few months, as higher funding costs
We all know that Australia is secretly an emerging market (EM), characterised as it is by dodgy governance, a resources curse, rent-seeking, asset bubbles and weak external accounts. In truth, the main point of difference between Straya and an EM is a sophisticated banking system that is able to mitigate offshore funding risks via wondrous derivative
It ain’t just China! Aussie bond yields are hitting new highs today as well as the back-up marches hand in hand with falling commodity prices. A full rate hike priced now: The curve is flattening again though: But we’re now outstripping US bonds: Frankly, the US steepening still looks very unconvincing: But the yield spread
Via Deutsche: Our early pick for Q4 CPI is for a strong headline print of 1.0%qoq, leaving headline CPI at 1.9%yoy. We expect core CPI to remain soft however, at 0.4%qoq to be up 1.5% in year-ended terms. (We will refine our estimate once the full suite of price indicators becomes available in mid-January.) The
From Bill Evans: The new Governor of the Reserve Bank Philip Lowe has used the minutes to the December Board meeting to clearly lay out his delicate policy challenge over the next year. We have been used to monetary policy being largely driven by changes in the inflation outlook or prospects for economic growth. While
From the RBA minutes: In considering the stance of monetary policy, members discussed the policy decisions made throughout the easing phase since late 2011, during which the cash rate had been lowered in aggregate by 3¼ percentage points. The lower rates had helped support the economy in the transition following the mining investment boom and, more
From The Australian: Avoiding deep scars on the jobs market from a full-blown economic recession is the Reserve Bank of Australia’s top priority, its new chief economist said in an interview. The fact that recessions can have a long-lasting impact on employment is one of the key lessons of the modern era, said Luci Ellis,
As folks start blathering about bottoms in Australian interest rates, I thought it was time to again assess where the Australian zero bound is, given that’s where we’re very likely going. I have long argued that because we run an externally funded little economy, the Australian zero bound is not actually at zero. That is,
Yes, it’s true, from the AFR: Carol Schwartz, a high-profile business woman involved in retail, property and philanthropy, will replace Heather Ridout on the Reserve Bank of Australia’s nine-member board. Ms Schwartz, who sits on the board of property group Stocklands and has held a directorship at Bank of Melbourne and been national president of
MSM idiot one: Financial markets are all but ruling out any further interest rate cuts from the Reserve Bank of Australia as the world’s most powerful central bank, the US Federal Reserve, tips it will be lifting rates three times during next year. The Fed’s first rate hike in 12 months comes as investors bet
More or less, via the AFR: Australian households are overgeared and the Reserve Bank of Australia might have to cut interest rates up to three times to ward off a dramatic deleveraging event in the economy. Credit Suisse strategist Damien Boey argues the output gap in the economy is widening at a time when households
The Fed has unleashed global bond carnage this morning as yields move to reprice rate hikes. US yields have rocketed: And the longer terms chart: Clearly the short end is pricing to the Fed’s three hikes for next year. But the long end is trailing so the slope is stable and is not exactly forecasting
From the AFR comes loony money: Real estate financier Qualitas, backed by Carol and Alan Schwartz, has seeded a start-up that allows small investors to offer home loans to Asian buyers shunned by the major banks. Peer Estate, founded by former Qualitas executive Adam Broder and ANZ banking tech expert Phil Aarons, and seeded with Qualitas funding, is an online marketplace where investors can provide
From The Australian: Commonwealth Bank has shadowed its peers in raising investor interest rates, with the move coming through a strong out-of-rate hike cycle that has largely targeted property investors. In a statement this morning, the nation’s largest bank said its standard variable investment home loan rate would rise seven basis points to 5.56 per
From Banking Day: Yields in money markets range from stable to rock solid, a factor proving to be of lesser importance amid an out-of-cycle hike on variable rates on home loans. ANZ and Bendigo Bank on Friday announced increases to variable rates, bringing the number of lenders that have made similar moves over the past
From the always worthwhile Vimal Gor at BT: There can be no doubt that Trump’s victory will be game changing geopolitically as it will alter the course of established diplomacy. Trump’s policies have also sparked calls for the end of the possible end of 30 year bull market in bonds as it is bringing our
From Macquarie: The 3Q GDP outcome will come as a shock. A casual contentedness around Australia’s economic performance had grown since the 3.3%YoY outcome reported in 2Q16. The outcome is a catalyst for expectations around policy to shift over coming weeks. The A$ is too strong for the economy We don’t think the
From Bill Evans at Westpac: As expected the Reserve Bank Board decided to leave the cash rate unchanged at 1.50%. With tomorrow’s prospect of a negative print for GDP growth in the September quarter, we were interested in whether that issue would be addressed in the Governor’s statement. To his credit he has done that
No surprise. Here’s the statement: At its meeting today, the Board decided to leave the cash rate unchanged at 1.50 per cent. The global economy is continuing to grow, at a lower than average pace. Labour market conditions in the advanced economies have improved over the past year. Economic conditions in China have steadied, supported
From the Shadow: The course of the world’s largest economy has become less certain with Donald Trump unexpectedly triumphing in the US Presidential election. On the other side of the Atlantic, Europe is bracing itself for more trouble as it stands by watching Italy hold a referendum on a change to its constitution. Domestically, unemployment
From Domainfax: Westpac is lifting variable interest rates on new and existing interest-only home loans, the bank has confirmed. The changes will come into effect December 16. The bank is said to be raising the standard variable rate by 8 basis points on interest-only home and investment loans. It’s only for a small segment of clients
From the AFR: Commonwealth Bank of Australia, the nation’s largest lender, is increasing rates on fixed term owner occupied and investment loans by up to 65 basis points, the latest of the majors to respond to rising international funding costs caused by the ‘Trump effect’, tougher underwriting standards and tighter rules. The increase means a
From Westpac’s Bill Evans: The Reserve Bank Board meets next week on December 6. The Board is certain to keep rates on hold despite the prospect of a weak print for GDP growth in Australia in the September quarter. Westpac’s current estimate is 0.2% – the lowest since March quarter 2011. It appears that the
Chris Bowen is talking it up, or is that down, at the AFR: Shadow treasurer Chris Bowen will on Wednesday outline the bleak scenario facing the nation’s banks and heavily indebted households if the AAA credit rating is lost, and blame the Turnbull government for exploding federal debt by $4500 a person in Australia. …According