Will rate cuts stimulate housing?

Predictably, the usual suspects are on the hustings promoting property in the wake of the RBA rate cut today. And why not? It’s always worked before. Hasn’t it? Well, actually it’s not that easy to tell. Here’s a chart of ABS YOY house price growth graphed against the RBA cash rate since the eighties:

The relationship looks very clear. When rates rise, the rate of growth on house prices falls. When rates fall, house prices rise. But here’s another chart for the low interest rate period of the past fifteen years:

Given this period is known as the Great Moderation (in the US at least) because the amplitudes in the business and economic cycles showed less volatility, it is somewhat incongruous to note that over the same period house price rates of growth have been increasingly volatile. And this is where the complication comes in. Several times over the past decade, Australian housing has sought a lower equilibrium price, in 2000 and in 2008. On both occasions, marked in red, the correction was averted by not just rate cuts, but by rampant fiscal support. In 2000 it was the introduction of the $14,000 first home owner grant. $7000 of that became permanent. In 2008 it was then tripled to $21,000.

This is not something that “housing bulls” like to mention but it has been a crucial ingredient in preventing housing down cycles from progressing. My guess is that we will not see the same intervention again this cycle unless things turn unruly.

So rate cuts will have to carry the load alone for the time being. Will they work? There has been a creeping recovery in credit for cars and mortgages since the nation realised that rates had peaked in July:

The number of loans has risen but remains weak and the total value of those loans has hardly budged for owner occupiers with a bit more effort from investors:

This split in the data surely suggests that the average loan size is actually shrinking. Meanwhile, there is a refinancing boom going on, also suggesting a keenness in the population to pay down debt, not expand it.

Yet another factor working against the efficacy of rates on housing is that contrary to some comments on this site, I do not think that the RBA will want to see a resumption of strong rates of credit growth by Australian households, as it has told us repeatedly over the last eighteen months and again last week. I suspect it would be quite content to see the current rates of growth or near enough to continue. The corollary is that rate cuts will be aimed, as much as possible, at sustaining present conditions, not boosting activity further through an expansion in household credit. So that means any appreciation in house prices will also run up against an unimpressed central bank.

Moreover, for further rate cuts to be delivered, we will have to see a further deterioration in general conditions both here and offshore. But if the globe is dragged towards a greater slowdown in growth by a European debt crisis and recession then debt revulsion will also increase here. If it’s a China slowdown the blow to confidence will be all the greater and will also hit mining sector investment. In that event, the RBA will find itself with some rather incompatible goals.

The outcomes for housing are far from certain.

Comments

  1. “The relationship looks very clear. When rates rise, house prices fall.”
    You seem to be confused between prices falling and the rate of increase falling. In all cases, apart from a short period in 2008, rising rates have been associated with rising house prices.

    “So rate cuts will have to carry the load alone for the time being.”
    Maybe, but why? If the cuts work then no fiscal action will be required. If they don’t work then why will fiscal action not be implemented. The Oz gov has enormous fiscal scope.

    “Moreover, for further rate cuts to be delivered, we will have to see a further deterioration in general conditions both here and offshore.”
    Not necessarily. All that needs to happen is that inflation falls. The RBA will then be required to cut rates even if everything is hunky dory if it is to maintain inflation up to the agreed level. Low inflation and good growth are not totally incompatible.

    • Yes, your’re right on first point. Slip of the tongue. Changed accordingly.

      On second point, as I say, if it gets unruly then I agree. But the point of the piece is to ask whether rates will work.

      On third, the RBA doesn’t just cut on inflation. As it said recently it will cut if inflation falls and there is a need to support demand.

      Finally, thanks for the illustration of the bailout mentality at he heart of the bubble.

      • Well nothing is sacrosanct. If we were coming off a high base that had retarded house prices for some time, then a few rate cuts would give a strong stimulus to house price growth.

        But we are not coming off a high rate, and house prices have only just moderated a little.

        So no – I don’t think that one small cut will make a great difference – perhaps some jawboning might work, but Stevens won’t do that to deliberately stimulate the housing market, he wants it to lie down for awhile.

        If we get two cuts, which I rather expect, then that will put a floor under price falls, and lift the most fallen markets – but that’s all. I doubt that anyone but the most determined salesmen would tell you otherwise.

        I expect that house prices will go through a phase which I call “the great big nothing” when they limp along anemically for some time, allowing wage growth to catch up a little. Not completely – we are in a boom after all – and that will be the story until something happens, or buyers are happy with prices enough to wade back into the market.

        In this economy someone will be hurting while someone else will be partying.

      • Peter, I have found much of what you have said over time interesting but a couple of things you say above don’t quite strike a mark with me.

        I agree that we may be in a Big Slow in terms of housing prices (as long as we maintain current employment levels at the near historical high they are – despite the claims of some of “mass unemployment due to the resources boom” by some here at MB.

        I am less convinced of the opportunity or extent of increased wages across the board. Public servants excluded. We are captive to this sector, most unfortunately. But in the productive economy I simply cannot see genuine room for significant income improvement. Retail – stagnant; housing – stagnant to decline; manufacturing – mixed but subject to global price pressure, likely decline; most services non-mining connected – stable at best; mining connected – reasonable as long as the boom continues.

        I just don’t see widespread opportunity for wage increases and hence the ability for future support for the property market.

        A 25bp decrease is nothing, the elation totally off the mark.

        My 2c.

      • I don’t disagree – we are very well paid on an international comparison given our dollars strength.

        I suspect that my “Great Big Nothing” will last for some time. We are cursed by our good fortune.

        If the value of our dollar fell to around $0.70 USD then gradually tourism would gain some strength, prices in those downbeat areas would increase slightly, and the cost of doing business in Australia would be reduced, thus allowing for some genuine wage growth.

        But then we would have high inflation, high petrol prices, and high interest rates.

        Which nettle do you grasp?

      • >If we get two cuts, which I rather expect, then that will put a floor under price falls, and lift the most fallen markets – but that’s all. I doubt that anyone but the most determined salesmen would tell you otherwise.

        Actually that is exactly my feeling. I think a single cut will provide relief from those under pressure but that is all. It will take two to give the markets a kick. However, given the speeches from the RBA over recent months, if we get to the point where 2 cuts is required something has gone wrong.

        My bet is obviously on Europe at this point.

      • Well Greece is the ultimate thrill seekers wager at the moment. Watching the anger on television, I think that any hope in winning the hearts and minds in a poll on that is slim.

        I really don’t think that Stevens wants two cuts, and I’m sure he doesn’t want house prices to gallop away again, or fall like a brick either – that cripples small business, and job losses follow.

        It’s a tough act, rather him than me. I would expect that the plan is incremental change over an extended period.

        I think they will keep just enough of a pulse to maintain life, but it won’t be going dancing for some time.

      • You say ‘lift the most fallen market’ but wouldn’t any ‘lifts’ (by which I assume you mean price rises) be more likely to occur in the ‘least fallen’ (i.e. strongest) markets?

      • revdoc – perhaps – I think that generally all states will move in the same manner but at different times, and probably at different amplitudes.

        So I expect the states who first went into a slight downturn to be the first out – substantially because they will be the biggest recipients of the mining infrastructure spending – But I’m not betting my savings on that, it’s just an expectation.

      • Peter, the great big nothing hypothesis relies on individual behaviour being quite benign and the RBA being able to walk a tightrope of monetary policy to keep it that way.

        I’m not convinced that this situation will occur; monetary policy is a big stick where more precise instruments are needed, and the emotional attachment of Aussies to housing makes benign and rational behaviour in the market difficult to achieve.

      • That’s a good point, and i don’t have a 100% guaranteed counterpoint. If we are not under financial duress Australians will get recession weary eventually and just buy because they can, and they want to. But the longer we can make that “Great Big Nothing” last the more affordable houses will be.

        In some areas they are already quite affordable, but there is still a lot of vendor resistance to discounting, and that won’t change quickly.

        If you look at the underlying points, and they are –
        1. We have solid employment.
        2. Wages are quite high.
        3. Interest Rates are low.
        4. Credit hasn’t contracted, and is readily available.

        Those are the conditions which usually lead to higher house prices, and voila – that is what we have.

        At least one of the above needs to change to drive a significant change in house prices. Until that happens, we have the great big nothing.

        The only one that I can see altering is interest rates, but we are now much more sensitive to rate changes than ever before, so that might be enough.

    • “If the cuts work then no fiscal action will be required. If they don’t work then why will fiscal action not be implemented. The Oz gov has enormous fiscal scope”
      No this time around though. The Govt is “committed” to return the budget to surplus. Labor’s too scared to do otherwise and the Libs (when thy come into power) would rather tank the economy than stray from their economic principles. Crazy but then that’s the current rhetoric.

      But of course the interest rate cut(s) will only positively impact demand for property if buyer sentiment and ability to take on mortgage debt improves sufficiently. And specifically first home buyers must bring new money into the market in order to kick start house prices, but that’s a long shot for a number of reasons.

      With fiscal stimulus off the agenda interest rates aren’t falling much more unless the Australian economy goes into reverse. And while the RBA seems quite happy to attempt a slow deflation of the housing bubble that seems to be the short term future until the current economic risks evaporate or come to fruition.

    • Further rate cuts won’t stimulate me as a first home buyer. I am mostly concerned with the price I pay for a house than the current interest rate. Interest rates are not the problem stopping me from jumping in and buying a house.

  2. “The RBA will then be required to cut rates even if everything is hunky dory”

    If everything is hunky dory then RBA will pursue its hidden mandate of stop debt growth and hence house price growth

  3. “Australian housing has sought a lower equilibrium price, in 2000 and in 2008. On both occasions, marked in red, the correction was averted by not just rate cuts, but by rampant fiscal support. In 2000 it was the introduction of the $14,000 first home owner grant. $7000 of that became permanent. In 2008 it was then tripled to $21,000”

    I would argue that the FIRST home owner grant would apply more pressure to reduce median house price than to increase it.

    It’s a fair assumption that your average first home owner is purchasing below that of the median house price.

    This was observable in 2008 with the $21,000 FHOG, where the bottom end of the market experienced solid growth. This explains why some regional areas barely skipped a beat through the worst of 08/09 while nationally, HPI was dragged down.

    On a second note, the FHOG was originally implemented to offset the introduction of GST on new home purchases, which itself had an impact on HPI.

  4. “Will rate cuts stimulate housing?”

    Na! It won’t.

    If it does, the cult of property ownership (Australian Sect) will just be completely unfathomable. And I’ll laugh myself pink if it does.

      • Thanks 3d1k, you made me chuckle. I can’t believe that the official interest rate falls 0.25%, as in a quarter of a percent, not wanting to say 25 basis points since 25 sounds big, and the whole country has gone nuts. With only a few folk telling everyone not to get their undies in a knot over this.

        I don’t know the Chinese reading for the characters in your Avatar is, but the Japanese reading is mu-suru, literally means do nothing. I like it!

  5. I think the various buyer grants are far more important, psychologically, than economists realise. It isn’t just a small addition to your deposit; it’s “free money”. It definitely influenced people I know to an extent far greater than I would expect for such a paltry sum, relative to the sale price of a typical dwelling in this country.

    Things like state-based stamp duty exemptions are also very important, but because they’re an absence of something rather than a desposit in your bank account, they seem to have less influence.

    Then again, it’s worth noting that real estate prices were already rising at the end of the 90s, before the FHOG, though they really took off after that.

  6. IMO they could, but given that the myth of house prices only ever being able to go up has been busted and that confidence has been dented, I think that it it unlikely.

    Unless
    -Europe suddenly finds a treasure chest loaded with euros or declares accounting errors that reveal a couple of unknown trillions, which would fix everything, including the worried mood in Australia.

    -US consumers start spending, the growth picks up some serious pace and they actually govern effectively.

    -China miraculously brings down inflation enabling a quick increase in the spending power of the poor and middle classes, while maintaining healthy growth requiring shiploads of iron ore etc.

    I’d really like to believe in a fairytale ending to this story and I could even see myself joining the debt slaves one day, but I just do not see any of the above scenarios happening.

    Hence my reply is No, it / they won’t, given that the banks actually will not be able to offer low rates next year, unless Europe fixes itself.

    I do apologise for the constant pessimism. It would be nice to read some positive news for a change. This global stuff has reached a point where everyone will lose in one way or other, and it’s getting to the point of “every man /country for themselves”. Sad.

    I’ve suddenly begun to enjoy the posts of the few optimists here simply to lift the mood a bit.
    My only source of optimism is the hope (!) and belief that US will pull itself together somehow and they will grow. Aus exports may just change direction then?

    I think it’s likely the Eurozone will soon split up one way or other, as Krugman just wrote in his column. Creating any kind of USE is politically unlikely to succeed. From a geopolitical point of view I can see why the euro leaders are willing to protect the zone so fiercely.

    • “I’ve suddenly begun to enjoy the posts of the few optimists here simply to lift the mood a bit. My only source of optimism is the hope (!)”

      High Five Mate! But careful with the “hope” aspect, HnH doesn’t hold with it.

      So much angst, anxiety, energy can be expended on considering the doom and gloom scenarios, which may or may not eventuate. If they do, there is nothing we as individuals can do to prevent it; and if it does not, and we muddle through – Hoorah!! Champagne all round.

      Cheers.

      • We can prepare though, by making sure we haven’t over invested let alone over leveraged whether an individual or business. Heading into this storm with high debt levels is very risky. Moderate debt levels are probably fine. My idea of moderate debt differs significantly from what is considered normal here.
        I’m not popping that Champas quite yet..

      • Oh No – Champers reserved for the “Muddle Through” scenario.

        I guess the ‘heading into the storm with high debt’ may rather depend on the nature of the storm, inflation, hyperinflation, stagflation, deflation…but I far from an expert on these things.

      • 🙂 Maybe Champagne would make the world look brighter anyway, even if the muddle through is not working out.

        My opinion re debt/inflation is that with the extremely high household debt levels to start with, even moderate rise in inflation in the presence of relatively high real rates would be nasty. Think of the households… But definitely not an expert on the topic either!

  7. I read this comment on another property chat forum today. What does everyone else think?

    – – –

    “In November 2010 the RBA raised rates by 0.25% and the banks added another 0.15% on top. It wasn’t just this rate rise that killed the market – it was the RBA jawboning that went along with it. The RBA gave the impression that there were many more to come. Inflation was supposedly out of control. The market at the time was pricing in another six rate hikes. The general public were staring down the barrel of a further 1.5% rise in official rates plus whatever the banks decided to add on top… maybe mortgage rates were going to rise by 2%. Some commentators at the time were saying we’d have double digit mortgage rates within a couple of years.

    This completely killed sentiment. The market froze and house prices started to fall.

    Now, with today’s cut, the situation goes into reverse. We’re back at May 2010 with the cash rate at 4.5% but this time, the extra seven future interest rate rises are no longer on the horizon. The general public can relax. Rates have peaked. They might stay at current levels for a while, they might even fall from here. But one thing is for sure, they’re not going up again any time soon.

    Today’s 0.25% cut will not be what lifts the market.

    It will be the realisation that the previously expected additional 2%+ increase in mortgage rates is now off the table.”

    – – –

    Google “bulls in panic mode” if you want to read the rest of the discussion (I don’t think I’m allowed to link to the other forum).

  8. 0.25% is unlikely to drive up house prices in the absence of additional monetary or fiscal encouragement but we can be quite certain there will be plenty of the usual suspects calling for precisely that.

    I think it is a big call to claim that in the absence of inflation the RBA will use interest rates for some secret mandate such as leaning against the wind of house price rises or credit growth.

    If anything the RBA has been going to considerable lengths to make it clear it does not grind those particular axes.

    If inflation stays on a leash the RBA seems very unlikely to increase interest rates.

    At best we might get some speeches along the lines in prospectuses that people should not bank on the future repeating the past.

    • The bottom line is that the RBA do not appear to have changed their approach at all.

      Interest rates remain the ‘ the demand hole filler for every occasion’ providing inflation behaves.

      This means

      * that if the world looks sick – push down interest rates

      * if unemployment increases – push down interest rates

      * if house prices sag – push down rates

      * if confidence stays soft – push down rates

      if houses prices sag some form of FHOG will appear even if it puts pressure on the budget. The pollies will not put their pensions at risk and standby without trying the foot pump.

      Pavlov’s dogs do not respond as quickly as ‘junior property speculators’ do to a time limited offer of free money.

      Our lever pullers are still a long way from losing faith in the magical powers of interest rate manipulation.
      Until

  9. I think rate cuts may work in reverse this time. Cutting rates just reinforces the feeling that things are turning for the worse. That is the RBA is getting worried.
    The recent article that indicated that savings are higher when rates are low and lower when rates are high (almost contrary to what most economic theories suggest) springs to mind.
    I think people are getting fearful and more rate cuts will only confirm that view.
    Global events have rightly (IMO) highlighted the problems associated with too much debt.

    • Agreed, most of the market is about sentiment. I’m not going out and buying up big this weekend…

      • as soon as interest rate rises are a possibility/probability would be smart assuming the world is kosher and the monetary triggers still work..

        big assumption yes

    • It’s because the reality that RE people live in is being challenged so I’m not surprised at their reaction – eg.
      – you can pay too much for a property
      – you may have to WORK for wealth
      – you are not a business genius

  10. To my mind, the single biggest factor that will supress property prices, regardless of regulatory actions, is “This”..what you are looking at now…the internet. Last time Australia/The World had a property slow down, the information was largeley resticted to newsprint and TV, and therfore easily manipulated. ( Even MB didn’t exist till a few relatively short moths ago!) This time, most of ‘us’ are aware of what is happening here, there and everywhere in the property market. And it’s going to make more of us prepare for whatever may happen…by taking the opportunity that lower rates presents us, not to ramp up more debt…but to repay that which we already have. The slow melt in property prices will continue; with breif period of euphoria ( “Property always geos up!) and then a return to reality.

  11. StanGoodvibesMEMBER

    Local and Central govt rely on property values to remain high for income/tax/positive spin/votes/etc. Swan pressures Stevens for a drop in rates now that property values are falling. Stevens lowers by the minimum 25 base points.

    That’s about as far as the intellectual rteasoning for the cut goes. The rest is fudge.

  12. If anything I think that this will increase the stock on market as people who have IP and who did not want to sell into a falling market will think that it is going to boom and get there proprty on the market while they can especially the BB

  13. Never underestimate the first keypoint of Bogan economics, the bogan does not know the difference between a need and a want and only looks at the monthly payment.

  14. Re: “In 2000 it was the introduction of the $14,000 first home owner grant. $7000 of that became permanent.”

    For the record, the extra $7000 wasn’t available until later: the “Commonwealth Additional Grant” (CAG) was introduced on March 9, 2001, at an initial value of $7000. It was reduced to $3000 at the end of 2001, and withdrawn at the end of June 2002. See e.g. Wood & Stoakes, footnote 7 (p.13).

    The CAG was introduced two days after the ABS announced that economic growth was negative in Q4 of 2000. The Government had the rest of the month to do something to avoid a technical recession, for which the GST would inevitably be blamed. That’s why the CAG was available only for new homes; it actually needed to stimulate construction, not just pretend to do so. Recession was indeed avoided, although the CAG had little time to make a difference in Q1 of 2001.