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Ben Kingsley Blog post by Ben Kingsley

RBA Rate Decision – November 2016

On this Melbourne Cup Day, Governor Lowe and his Board met, and they’ve kept interest rates on hold. It is an interesting time in our economy at the moment because the RBA is wrestling with one big problem and that is the growing amount of household debt. We are starting to see the household debt to GDP ratio increasing, and that is concerning. What we would like to see when we see low-interest rates is the level of household saving growing. But we are not seeing that and is concerning the Governor and the Board.

In addition to that, there is also the price movement in Melbourne and Sydney when it comes to bricks and mortar. Property prices are continuing to grow at very high levels, and we are still seeing investors heavily active in the market. Now naturally, we are a business that provides the opportunity for investors to get into the market but even we are concern about the level of investors’ activities. When we start to see almost 60% of all new loans in New South Wales going to investors, that is concerning for us considering the long-term average had been around the 30% – 40% range. Now, what does that mean? Does that mean we see a transition around our two big capitals into a new market environment? Traditionally, we have been 70% owner occupier and 30% investor. Are we seeing our big cities becoming places where investors are looking at bricks and mortar as a long term opportunity like what we see in New York and London where household percentages of investors or people who rent in those cities are around that 70% mark? Now, that could be the case. We could be transitioning more towards a dense population in our big capital cities and our big service and financial hubs. Owner occupier might be pushed out of the market, and that is a conversation around affordability.

It is getting harder and harder for many Australians to get into our big market. The Government is, of course, aware of this housing affordability issue and it is very much a supply story. At the moment, we see this Spring selling season, some of the lowest supply levels of property on the market and that is also adding to the increased valuation of property that is going through Melbourne and Sydney at the moment. Clearance rate at the 80% mark absolutely indicates that housing prices are continuing to rise in those areas.

So on one hand, the Governor and the Board have got challenges around potentially dropping interest rate if the economy needs more monetary stimulation but on the other hand, who’s actually using that money?

I think they want to claw back households from using more and more debt and getting ourselves into a position where the economy is getting pressured by household debt. It’s a challenging situation, and I suspect we will hear more from APRA, the Australian Prudential Regulatory Authority, who may be getting involved in this conversation. We may see some further tightening regards to some lending policy in regards to household borrowing money. We obviously need it in other states. We are seeing a migration from Perth and Western Australia where there is a decline in people living in Western Australia and moving back to the eastern states because there is more jobs opportunity there. This will cause a housing market with lots of oversupply and lots of vacancy rate. In terms of running around Australia, the strongest economy is NSW followed by VIC and then we are talking about Canberra, and then South Australia, then we go to Brisbane and then we’ve got Darwin and Northern Territory. It is an interesting mix because again, monetary policy should be about stimulating jobs and business to borrow money against those other centres as they struggle to correct themselves after the big mining boom that we’ve seen.

So it is an interesting time. I also see confidence is up. Now, households are willing to borrow more money because maybe they are feeling more confident in their job. The unemployment rate had dropped down by 0.1% in the August data that we have seen to date, so we are now seeing a national unemployment rate of around 5.6%. We still have spare capacity, and we are not necessarily seeing all of that translate to a full-time job. But is that another example of a changing economy and a changing way of people are employed in this new economy, this technology economy that we are going to be moving to over the course of 10 – 15 years? It is an interesting time. I don’t see interest rates being reduced this side of Christmas but I think if we see some shocks to the global economy, then we will see some further rate cuts in the Australian market. So long as we can rein in that household spending and start to see ways which we can incentivised business lending to try and drive more jobs. That’s the time when we should see confidence around the economy, monetary policy actually going the other way and we see rising interest rates. I don’t see that in 2017 at all but it’s early days yet.

So interest rates on hold on this Melbourne Cup Day. Hope you pick a winner in the Cup, and I’ll speak to you next month.

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