Australian Consumers’ Vulnerability,House Prices and Credit Demand
Consumer health in Australia. Indebtedness measures need to be examined carefully… • Measures of debt to income (“financial health”) overplay the fragility of households. Leaves out equity in home and investment properties, super et al. • That’s important in Australia given switches in household balance sheets
On house prices very difficult to know….But excessive pessimism should be avoided • Large house price falls require excessive gearing, inability to service the loan (and hence forced selling) and large excess supply • Gearing has increased yes. But be careful • Total demand supply not that much out of line. Excess CBD units does not equal excess general supply • albeit can have ripple through effects • Inability to service the loan is critical if you are to get forced selling.
On rates….and fragility... • Hence the big picture is all about employment not debt.Real problems arise when they lose all ability to financetheir loans. • But at this stage labour market still strong - Unemployment 20 year lows.We expect unemployment to broadly stay around current level(around 5 1/2%) over next 12-18 months. • Of course interest rates can hurt. Don’t need to move much.Remember cash rates at around 6 1/2% takes as much out ofhousehold incomes as 18% in late 1980s!!!!.
On rates….and fragility…Picture very different across states • Remember higher • gearing means that don’t need to go up much to kill affordability • RBA knows this and unlikely to do it.
Domestic Sectors still reasonable after slowing in early 2004. Construction seems to be plateauing at high level. • Also regional differences: NSW & Vic weak: WA & Qld Strong.
Looking forward into 2004…. • Dwelling investment to fall but not as far as previously expected. • Activity forecasts • 2002 24.4 % • 2003 8.2 % • 2004 -1 % • 2005 -6 % • Essentially forecasts arefor10% fall in construction activity from mid 2004 tomid2005.
RBA Worried by Early Data for House Prices in March………but • Our data not showing much of a fall. And we know APM data very suspect. REIA data for Melbourne flat in March.
On housing credit demand some modelling results suggest a slowing but still strong….
Sensitivity Analysis: If allow for sustained 20% fall in house prices from here get more dramatic slowing in credit but mainly 05………(And would provoke different policy reactions).
Rates………Our view is • In brief: • prior to the May MPS we had a move (25 points up) in June: • but RBA seems less concerned about the need to do anything soon; • we believe the “fundamentals” of the case will continue to build; • hence we still have one more rate increase of 25 pts in September. • Thereafter, we expect the RBA to “sit and watch”, bringing the current rate tightening cycle to an end. While further upward adjustments are still possible they would only be necessary if domestic and global activity prove stronger than we currently expect.
Interest Rates - Our adjustments relatively minor on cash rates but longer run rates more likely to be effected by bond market sell off in 2005.