Rising on empty

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Who said stimulus doesn’t work? Well…most of the Western world for a start. John Maynard Keynes described the ailment weighing them down. He called it a liquidity trap; when interest rate cuts cease to promote borrowing because a population is busy hoarding resources for what is widely seen as an adverse event to come.But not here, not yet at least, and that’s a relief. This week showed that both fiscal policy (government spending) and monetary policy (interest rates) are still having an effect.

Let’s start with what obsesses us most: house prices! This week the Australian Bureau of Statistics (ABS) released its June quarter house price index and although it showed prices falling in Melbourne, Hobart and Canberra the national aggregate rose 0.5% as Sydney and Darwin took off. Running with the national number, ostensibly this is what you might expect given the sequence of generous interest rate cuts that have been offered up in the last six months.

Yet, there are still several vital ingredients missing from the house price picture that mean we can’t yet call this a recovery. House price rises are driven by supply and demand factors, sure, but the next most important input is credit. Without growth in total mortgages, it is very difficult for prices to rise sustainably. And on this score, the Reserve Bank of Australia (RBA) released its credit growth statistics for the year to June and it showed growth still falling:

As you can see, housing credit growth is slowing, with the month-on-month growth from May to June the lowest since mid-1984 and the second lowest on record. But it is at least still growing, though well below levels we would traditionally associate with house price growth.

So, how can we have such weak housing credit growth and rising house prices? It is possible and we don’t actually have to look too far away to see a similar phenomenon in action. In New Zealand between 2009 and 2011, prices rose as the number of mortgage approvals actually fell. One possible explanation for this is that the relative number of housing transactions fell faster than the relative amount of total credit. In short, more credit went into fewer sales.

Whether this is happening or sustainable for Australia is another question. I have my doubts. Either the recovery broadens out and credit will pick up or prices will resume their falls. So far there is no evidence of the latter, but if we get a decent economic environment for a quarter two you never know. My own view is that the bigger picture of falling commodity prices from a sharply slowing global economy, combined with an ageing population, will outweigh the positives before too long, which is a subject I cover in next week’s edition of Macro Investor .

For the time being, however, stimulus is also proving effective in retail, which was the other major economic release this week. The combination of interest rate cuts and government rebates associated with the carbon tax has proven too tempting for loose fingered Aussies, and we’re off to blow the largesse at the shops:

Retail has now broken out of its two year slumber and has done so in style! The June report showed a broadening out of new retail spending with areas like department stores, which seemed a few months ago to have the prospects of dinosaurs, suddenly doing quite nicely.

However, I would still characterise this spending as a small items recovery with clothing, food and eating out doing nicely whilst the big ticket consumer goods that one finds in the “Household goods” segment now languishing. The caution embedded in this pattern of spending was confirmed too by the same RBA statistics I referred to earlier, which showed that revolving debt, credit cards etc, remains deeply unpopular. At Macro Investor we remain leery of discretionary retail stocks despite some obvious value. In next week’s edition, we offer a study of the relative strengths of the eleven sectors that make up the ASX over the long term and retail comes in last!

But this was a week of good news. Economists can relax. Australia has not yet been drawn into the “liquidity traps” of other Western nations, interest rate cuts still have some power to effect behaviour. The government too can smile, given its carbon tax has so far had the opposite effect of the scare campaign run by the Opposition, with households not only undisturbed by the tax but rushing to spend their rebates.
Of course, the rebates will run out in due course and turn into austerity. At that point we’ll know for sure if rate cuts still have their power to dazzle or whether we’re just lagging some way behind our northern brethren.
This is an op-ed running in the Fairfax press today.

Leith van Onselen is the Chief Economist at Macro Investor, Australia’s independent investment newsletter covering stocks, trades, yield and property. Visit Macro Investor for your 21-day free trial.

About the author
Leith van Onselen is Chief Economist at the MB Fund and MB Super. He is also a co-founder of MacroBusiness. Leith has previously worked at the Australian Treasury, Victorian Treasury and Goldman Sachs.