The house price spike freaking out economists

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Following the Kouk yesterday, another economist has fallen into the bull trap laid before our feet. This time it’s Craig James of Comsec. From the AFR:

Australian house prices at close to a 15-month high could prompt the Reserve Bank to scrap plans for any further interest rate cuts, according to CommSec chief economist Craig James.

Mr James’s view follows RP Data-Rismark Daily Home Value Index data which shows that home prices have gained 1.3 per cent since the start of the year. The index is at its highest level since November 2011.

Mr James said that if demand for homes continued to improve throughout January, boosting house prices, the Reserve Bank would shelve any nascent plans it may have had for further interest rate cuts.

Here is what is weirding everyone out on the national chart:

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In technical terms, this could be an inverted head and shoulders bottom. That is if you think technicals can work in housing.

Here are the cities. Sydney trying to breakout:

Melbourne not trying:

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Brisbane broken out from a low base:

Perth climbing:

And Adelaide not trying either:

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So, of these, only Perth looks to have convincingly broken out and we know that it is attached more to the shifts in commodity prices than it is to wider forces. Like UE, I expect Perth could have a better year than other cities but it will also be facing rising risks as the year rolls on and mining investment diminishes.

The last thing to remember here is that this index is no longer seasonally adjusted and as a daily beast we have no idea what it is we are looking at. The logistics of collecting the data suggest that there must be a delay so I think it very unlikely that we are looking at January sales here. As you will know, there pretty much aren’t any. Not knowing the lag is a problem.

Moreover, there is as yet little corroborating evidence for a broad-based lift in credit aggregates (beyond the spike in investor activity).

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Now, I fully admit that if the major eastern cities breakout then rate cuts are off, but then, they are already off on the iron ore price surge. Moreover, the RBA will know that without some price action they have no hope of generating the new home sales they need to replace falling mining investment in the second half.

Let’s see how we go as the year rolls on, the dollar rises on the bull trap and unemployment climbs steadily.

One other thing of note, how much has the national attitude changed if Craig James is one of the first to leap on a tiny bump in house prices as triggering RBA concern? A long, long way.

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About the author
David Llewellyn-Smith is Chief Strategist at the MB Fund and MB Super. David is the founding publisher and editor of MacroBusiness and was the founding publisher and global economy editor of The Diplomat, the Asia Pacific’s leading geo-politics and economics portal. He is also a former gold trader and economic commentator at The Sydney Morning Herald, The Age, the ABC and Business Spectator. He is the co-author of The Great Crash of 2008 with Ross Garnaut and was the editor of the second Garnaut Climate Change Review.