ANZ: RBA to slash and burn, housing do nothing

Via ANZ:

The RBA seems to be in a hurry to get the cash rate lower.

Following this week’s RBA Minutes and a speech by Governor Lowe, we have brought forward the expected rate cuts to July and August.

It is our expectation that the combination of lower interest rates, a much flatter yield curve ( driven in part by the forward guidance the RBA is already effectively providing), a lower AUD and tax cuts will provide the boost the economy needs to get back onto a growth path that will push the unemployment rate lower over 2020.

But more stimulus may eventually be required. In particular we are concerned that the global evolution of monetary policy may mean the AUD struggles to move lower.

This call for two more back-to-back cuts puts ANZ at the front of the pack.

It another note, ANZ is not bullish on house prices at all:

ANZ Research argued in April that signs of an end to the housing downturn were emerging. Since then a number of favourable developments have followed. The Reserve Bank of Australia (RBA) cut interest rates, wholesale market funding conditions have improved, the prudential regulator has proposed easing the mortgage interest rate floor, the Australian dollar has fallen and tax cuts will be delivered through the second half of the year.

But the critical question for the future of the housing cycle is whether it is restricted credit supply or subdued credit demand that have been more important in drivingthe downturn.

If it’s primarily credit demand then signs of market stabilisation, coming after the largest Australian house price decline in modern history, should encourage a V-shaped housing recovery as demand for credit returns.

But if it has been primarily credit supply – as we believe – then the housing cycle will be much more subdued.

While The Australian Prudential Regulation Authority’s (APRA) relaxation of the interest rate floor will provide a modest easing, it is only small compared with the range of other measures that have been tightened in recent years and which, in some banks, will be ongoing.

Consider the banks’ increased focus on debt-to-income ratios across their mortgage portfolios. For some borrowers that will constrain the increase in their maximum borrowing limits to be no greater than the growth in their expense-adjusted income.

Modest growth

It has simply become more difficult for house prices to rise more quickly than income for sustained periods. And income growth itself is, of course, only modest anyway.

There are also two important top-down constraints likely to operate over the medium term.

The first is leverage. Many are treating the slowdown in housing credit growth to a four-decade low of 3.8 per cent as temporary.

But the rate of household income growth is still very modest at about 3 per cent. Tax cuts will see that pick up closer to 4 per cent over the second half of the year. But in order to stabilise the household debt to income ratio over the medium term, barring a surprising pick-up in household income, credit growth can’t grow more quickly than it is at present.

The second is affordability. The recently released ANZ-CoreLogic Housing Affordability report shows various measures of housing affordability have improved over the past year or so. But the improvement in purchase affordability has been only modest and unevenly spread.

On a dwelling price to income basis, for instance, affordability in Canberra and Tasmania has continued to deteriorate, Adelaide has seen no meaningful improvement, and Brisbane has only become more affordable very recently.

Affordability also needs to improve just to keep pace with the tightening in lending standards. In this sense, a given level of affordability today implies less borrower activity than it might have historically.

That means continuing to pull first home buyers into the market may be challenging. State government initiatives saw the number of first home buyers rise sharply in 2017, but they have since declined.

Rising affordability

The ANZ-CoreLogic Housing Affordability report shows a big drop in dwelling values in a number of areas – most prominently in Sydney and Melbourne – which means housing affordability should improve.

Cam Kusher, Head of Research – Australia for CoreLogic, says the Government’s re-election and recent interest rate cuts have both contributed to better stability in the market. “[Despite this,] we still believe that it’s going to be more difficult than it has been in the past to access finance [and] credit growth is going to be a lot slower which means the recovery is going to be fairly slow.”

In fact, the most persistent trend in improving affordability is for renters. The national rent to income ratio has declined consistently since 2012 and has returned to 2007 levels as growth in rents dipped to recession levels.

The improvement in rental affordability also suggests some potential first home buyers may prefer to remain as renters. We tend to presume more people buying and owning a home is desirable – even though Australia has a very high home ownership rate. As tastes and demographics change, renting is likely to become an option preferred by more, and not just those unable to afford to buy.

ANZ Research doesn’t expect a V-shaped rebound in house prices and neither do they expect a material and sustained improvement in the flow of credit.

Much of what has driven the housing adjustment over the past two years is permanent, affecting both supply and demand. Modest improvements in affordability, therefore, are likely to be insufficient to reduce the affordability overhang and drive a material increase in housing demand.

Houses and Holes

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 fouding 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.


  1. Probably because ANZ pulled there head out of the sand. Wasnt there something about Westpac not being bullish.

  2. DominicMEMBER

    From the Fin Review a few days ago:
    “ASX-listed investment firm Moelis Australia has acquired 54 brand new apartments in one line from Sydney developer Payce for close to $30 million. The apartments, sold at a discount, are all in a single block known as Vision, located within the 779-apartment mixed-use “South Village”project in Sydney’s Kirrawee.”

    “Based on market prices for units sold in the area last year, the deal came at a discount of between 20 to 25 per cent.”

    Good luck with that!

    • JojoyubbyMEMBER

      This may just be a ”force acquisition” due to the developer unable to repay the finance. God knows what happen behind the scenes.

      • DominicMEMBER

        I think it’s little more than an investment group bargain-hunting in difficult conditions for property developers. They really are struggling. The thing is though, investment success is about judging the risks correctly and paying an appropriate price. I’m not sure what their time line is but I’m not sure they ave this right. We shall see.

      • Agreed Dom – I hope Moelis don’t pop the champagne corks until the exit this trade. 25% paper discount going in still might not be enough to get out. There will be more of this.

    • Yeah this is the part of the cycle where vulture funds step in to snap up “bargains” only to realise later they caught a falling knife. The managers of the vulture funds don’t care either way as they still get their fees…

      • DominicMEMBER

        Far from it. Looks like the Aussie branch of a US based ‘socially sensitive’ investment bank. I know, right?

      • Moelis aren’t sensitive. I’ve met Ken Moelis as he was an alum of my business school and at the time UBS (where he was) wheeled him out to campus to press the flesh. He is ex Drexel Burnham, ex DLJ – some of the most (in)famous hard core old school investment banks. If you are reading sensitive then you are wrong. UBS LA under Ken Moelis was known as a sweatshop for junior bankers.

      • Lol. I am solely focused on US equities. So can’t spend much time here.

        However, I will be buying a house soon though 🙂 .. at least 50% LVR is the target. So good to be back.

  3. kannigetMEMBER

    All the banks have a vested interest in sales continuing along and prices rising, the most likely to sell are those most likely in hardship and as they are using tighter criteria those buying are more likely to be able to afford it. Helps them clear their risk profile…

  4. Mining BoganMEMBER

    Well, Rabobank just cut their online savings account by .25%.

    Looking at you Lunatic, that’s less spending you just caused.

    • Speaking of which, WTAF is going on with *that* area!? Nothing useful is under 1.1 mills … Whisky Tango Alpha Foxtrot?

      Alston, Alstonville, Bangallow, the back of those hills, quite far from anywhere: 1.1-1.3… holy crääp!

      • @Gavin considering that there’s no secret millionaires spring in that area, I struggle to see how 4 acres in buttfsck nowhere is worth *that* much

      • I knew a guy years ago. Baby boomer age. Sold his family home in eastern suburbs Bronte for millions and moved to Bangalow. It seemed he knew plenty of people up there and I guess it was a trendy locale for tree change boomers. Just inland of Byron Bay I believe. Those prices paid arent local farmers or shopkeepers.

  5. proofreadersMEMBER

    For a banker, never been a better time to be alive, but for a saver/fixed interest income reliant retiree, never been a worse time?

  6. Jumping jack flash

    “Consider the banks’ increased focus on debt-to-income ratios across their mortgage portfolios. For some borrowers that will constrain the increase in their maximum borrowing limits to be no greater than the growth in their expense-adjusted income.”

    this actually means there will be no increase in borrowing limits, except if these foolish banks see the light and ignore debt to income ratios again. Which they will as soon as their shareholders ask them to.

    “The ANZ-CoreLogic Housing Affordability report shows a big drop in dwelling values in a number of areas – most prominently in Sydney and Melbourne – which means housing affordability should improve.”

    you would think so, wouldn’t you? Unfortunately it isn’t going to happen. Affordability is a function of debt acquisition, it has little to do with the actual price of the property. A property could be $1m. Nobody can afford that, nobody has $1m sitting around in their back pocket, but if they go to the bank and ask for $1m and the bank says yes, then its suddenly affordable.

    Debt acquisition relies primarily on income, and incomes are going nowhere, for a looong time.
    Unless you’re in a position to continue gouging the prices of your services to pay yourself more without going out of business, or, better yet, steal wages by utilising cheap imported labour, then you’re stuck with what you get until you change jobs, if you can.

    Lowering property prices only means that the amount of debt required to afford one is less. Debt is still required.
    Its not like house prices will get down to the point where I could pick one up for the value of my savings! You can’t just give them away, you know!

    But the most important point is that as property prices decline, banks are less inclined to fork out debt to everyone to plonk onto a depreciating asset.

    and that is how cheaper properties still don’t become more affordable. They have to be horrendously overvalued to begin with though – values getting that way through debt inflation and greed.

      • Just got back from a trip to the local shopping centre. No customers. Every shop has +50% discounts. I know it’s eofy, but this is the worst I’ve seen.

        We are in the early stages of recession. Businesses to start going broke later this year. Consumer goods to get expensive next year ala the UK I think.

      • Mining BoganMEMBER

        You know who’s doing it tough? Costume shops. Me and Lovey got our kit for the annual costume do today. Costume people said a lot of those events have disappeared because of the expense. At $100+ I can understand it.

        Once people are cutting back on the chance to show off on stalkbook you know it’s over.

      • tuohyredMEMBER

        Updated some small kitchen gear over the last 3 years. Google knows me and I’ve had heaps of discount offers from multiple vendors over the last 2 months prior to EOY sales – this discretionary area appears to be doing it very tough.

      • “”Just got back from a trip to the local shopping centre. No customers. Every shop has +50% discounts. I know it’s eofy, but this is the worst I’ve seen.”
        I was at Highpoint Shopping Centre in Melbourne early on a Friday afternoon this week.
        Even if you want to spend money, you are typically faced with two rather stark choices.
        Either cheap and nasty/ugly junk that won’t last or overpriced semi-decent stuff (which is only worth buying on sale).
        Clothes brands that I used to buy 10-15 years ago because it was worth it, I no longer even bother looking at because of how they have been cheapened.

  7. yeborskyMEMBER

    Whinge, whinge, whinge all the time. The lovely folks at CBA offer you their best – a term deposit rate of 1.9% for 12 months. Grab it – it won’t last long at such astonishingly good value.