The Reserve Bank board faces a dilemma when it meets next week to decide whether to follow its Kiwi counterpart to a cash rate of 2.5% (down 0.5% yesterday). It’s basically a choice between looking at housing or business.
Against all predictions, including mine, Australian house prices are rising, not falling, but business conditions are deteriorating, which spells trouble for employment.
One sign of this came from the data on credit yesterday from the RBA; owner-occupied housing loans rose 0.8% in March while business credit fell 0.6%.
And according to the RP Data-Rismark measure that came out yesterday, house prices went up 0.6% in March, including 1.5% for Brisbane and 3.3% for Canberra. In one month! That followed a 1% rise in national prices in February.
There are two specific reasons for this, in my view, plus one general one. The additional first owner grant of $7000, on top of the existing $7000, has clearly made a difference, but the main thing is the decline in mortgage rates.
Banks have famously not passed on the full cash rate cuts, and fixed rates have been rising lately because bond markets have been hit by the tsunami of government paper. But borrowing rates have fallen by around 3%, reducing the cost of servicing the average mortgage by more than $7000 every quarter.
None of this would make any difference if homebuyers here were as despondent as those in the United States, but they’re not.
This morning Freddie Mac reported that the 30-year mortgage rate in the US had fallen to a record low of 4.78% (on average) in the week just ended. A year ago the rate was 6.06%.
Yet US house prices are still falling. The Case-Shiller indices that came out on Wednesday showed a fall of 1.9% in March, continuing a pattern of roughly 2% monthly declines for the past six months.
Over the past six months the national US house price index has fallen 22%, compared to a 12% fall in the previous six months.
The difference is that Australia’s economic problems are still seen as cyclical while Americans have had to confront the notion that their society has deep structural problems that will take a long time to repair.
So Australians are clearly looking through the downturn and believe the official forecasts of a cyclical recovery next year. (A $70 billion budget deficit for 2009-10 might shake them however.)
Businesses, on the other hand, are having difficulty looking through next week.
Borrowing costs for companies have not come down at all, and loans are very hard to get at any price. This is a global phenomenon: US spreads on BAA corporate paper are the highest since the Great Depression.
Business confidence collapsed last September and has continued to fall; as a result the labour market is likely to deteriorate through this year and into the next election. And meanwhile a desperate Kevin Rudd has now run out of fiscal stimulus, having thrown cash at voters who don’t need it rather than businesses that do.
Bottom line – a 50-point rate cut is clearly justified next week, but it probably won’t happen. The RBA has clearly signalled that it’s on hold, and yesterday’s house price and credit data won’t do anything to change its mind.
But it should. Unemployment will ensure that the cash rate is 2%, probably by year-end; there is no downside, and only upside, in getting there more quickly.
This article first appeared on Business Spectator.
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