Goldman: More rate cuts possible


From Tim Toohey:

A feature of our research over the past 18 months has been to break away from the guide posts that have served us well in obtaining a read on the future direction of economic activity over the past decade. Historically we had looked to easing financial conditions, rising confidence and rising wealth as important touchstones for a future acceleration in economic activity. These were indicators that had proved their worth over the prior 30 years. As such, our decision to adopt a far more cautious view than the consensus over the past two years was not born of the idea that these indicators were suddenly of less worth. They were born from the idea that there were other forces that were likely to be more powerful, namely the likely sharp decline of the terms of trade, the likely sharp decline in mining investment and a lack of economic incentives to drive a pickup in broader business investment, the likely persistent challenge of fiscal consolidation and an uncompetitive production base relative to Australia’s trading partners. In the background the rapidly changing nature of Australia’s demographics also provided amber warning lights challenging the idea that a typical industrial recovery beckoned.

The consequence has been the heralding of false dawns of economic recovery that have lulled investors into the belief that recovery in the non-mining economy had commenced. There has been no shortage of economists that have raced to the conclusion that the Australian economy had commenced an economic recovery pre the 2013 federal election and that momentum was to sustain Australia into 2014 and beyond. A number of economists in March of 2014 expected interest rates to rise in 2014, some before mid-2014, others by year end. More recently the RBA championed the idea of a 3Q2014 recovery led by consumer and business surveys. However, yet again expectation has failed to meet the economic reality.

Our bias was to be more cautious. Goldman Sachs was the last forecaster in Australia to hold on to the idea that a further RBA interest rate reduction may be required. We believed that Australia’s trade accounts were set to deteriorate rapidly, growth data underwhelm, and expectations with regard to the Fed tightening shift such that a change in the RBA policy bias to easing would have been sufficient to cause a material easing in the real exchange rate.

We somewhat reluctantly removed that forecast in August once it became clear that the RBA no longer viewed house prices expansion as a catalyst that may spur consumption spending, and instead began to view house price expansion as a risk to financial stability.

Moreover, the RBA has taken a step further and declared that macro prudential rules are set to be introduced, perhaps before the commencement of 2015.

While there has been some client enquiry as to whether the introduction of macro-prudential rules by the RBA and APRA would provide it with the ability to tighten policy for home lending at the same time as being able to cut interest rates for the broader economy, we don’t see this as the RBA’s intent. Instead, the RBA/APRA would likely implement any changes and choose to pause for several months to assess what impact was achieved. In any case, we believe that investor lending by Australian residents will cool of its own accord. On a post-tax post-expenses basis residential property investors are no longer cash flow positive from investing a marginal dollar into housing and the combination of negative real rental growth and rising vacancy rates will likely see investor demand dissipate in coming months. Of course, expectations of macroprudential measures or mortgage risk weightings that will bias bank lending away from investment lending could well diminish the expectation of future house price appreciation, even if any lending restrictions are relatively minor in an absolute sense.

All very well put. I will only add that the touchstones of accelerating growth of the last 30 years have changed in one important respect: consumers no longer spend asset-based wealth like they used to, knowing that it is in some way ephemeral.

Macroprudential and more rate cuts are coming.


Houses and Holes
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  1. ‘On a post-tax post-expenses basis residential property investors are no longer cash flow positive from investing a marginal dollar into housing and the combination of negative real rental growth and rising vacancy rates will likely see investor demand dissipate in coming months.’

    So we need those Chinese buyers in their droves then…….

    • “..negative real rental growth..”

      That’s ok, another year of negative real interest rates will fix that.

      • They will have to be brutal to have any real effect now. In either case, a light or heavy touch would precipitate a crash. Politically, it maybe better to wait for a crash to commence (count six months) then institute macro prudential measures – using the excuse that we don’t want this to occur again. Its implementation after the bubble event will of course compound the bottom – and there will not be any real recovery to previous heights either (which may be a good thing?).

        In either case, I don’t see any evidence that this bubble in Oz is about to pop. It could get substantially higher yet – and run another 12-18 months if left unchecked.

      • You little beauty! Go Australia! I would dearly love to see Oz house prices continue to ramp up at the same time as manufacturing shuts down and the mining capex cliff hits.

        Let’s turn this one up to 11!

  2. Hmmm gold looks good …….nope
    Hmmm term deposits look good ……nope
    Hmmm – equites look good ….. nope.

    Gee where is one to put ones money ? Preferably somewhere safe as houses …..

  3. we need lower interest rates to bring down the dollar, screw real estate its already beyond saving

    • Really?

      How much lower do you want the dollar – serious question.

      At what price will you stop calling for a lower dollar.

      Haven’t you got your way already.

      It was once $1.10

      Chinese love that they can buy more real estate for their RMB

      • Then promise not to call for anymore reductions?


        You don’t think we’ll encourage inefficiency at that rate?

      • Wages only halve if you’re not productive. Don’t employ right equipment have right procedures have the right infrastructure etc etc

        We’re not third world. We don’t have to have that mentality.

        Halving wages is a lazy way to do business.
        The inefficient way I mentioned above.

      • you think they are not productive in china, Vietnam, Taiwan, Thailand, you think they don’t have robots, assembly lines, basically the same machines as we have here, you think a person on $20 and hour taking products out of machines and putting them boxes in OZ are more productive then someone on $4. lol

        a high dollar means we gotta be more productive, AT WHAT????? WHAT???? more productive means sacking 5 people and ordering the product from china cos there is NO OTHER WAY TO MAKE IT IN THE KNOWN UNIVERSE

        you think paying $400 to call in an industrial electrician to fix a coil on a pump in Australia is more productive then paying $40 for one in china.

        don’t bore me with laziness

      • Alby

        Holden made it clear that wages weren’t the major issue.

        Don’t you think some of the costs relate to rent perhaps.

        Do you really believe halving a technician wages would make much difference to the $400/hr in your example?

        Now I’m bored.

      • Fantastic. Then you should be well pleased that we have high property costs, high production costs and high wages with inflationary govt policies so that you can have your dream of a lower dollar.

        Tell me…. what happens if the dollar was 10c? And things weren’t going Australia’s way?

        Surely you wouldn’t call for a lowering of the dollar. A dollar getting close to zero isn’t the answer.

        That’s to say your logic can’t hold at low levels. It becomes ridiculous.

  4. Cut interest rates to 0%.

    That way with an interest-only loan, the houseless whingers can buy a house without spending a cent.

    You can’t get any more affordable than that. That should shut them up.

  5. Patrichead skim pass that one 😉

    You call us whingers? while you sit on your healthy self retirement fund buying more property. society cannot go on at this rate. The next generation cannot keep borrowing more just to support previous generations.

    • Ye of little faith! Everyone who has said what you just said in the last decade has lost money in Oz!

      Everyone who ignored such rubbish, levered up, and bought has made a lot of money.

      When will the crashnicks and bears realise that they were wrong, and will always be wrong. Property is a million percent government guaranteed! It’s THE asset class!

      Lever up, buy houses, you can’t lose!

      • Obviously you are a troll or very naive. If you are a arrogant fool I won’t feel bad when you’re housing ponzi scheme has its domino effect.

      • I’m neither. It’s my opinion the economic stupidity in Oz has become so extreme that you’re stuffed anyway you look at in the medium term. Might as well cheer on the bubble and see how big it can really get. The faster it ramps up, the sooner it blows. A Japan style slow melt is the worst case scenario; if that happens, I’m never returning to Oz.

        When the SHTF I want it to be truly epic! I live in California with my family now (one of my 3 kids is born here), and when Oz blows I want to be able to hear the cries of ‘whocoodanode? ” echoing through the Golden Gate.

  6. Shock news: Banker calls for cheaper mortgage debt.
    …in other news, barbers call for govt subsidised haircuts