The Reserve Bank of Australia has expressed guarded optimism for the future of Australian property financing in the midst of the continued global tightening of credit availability.
In his speech on Friday to the Queensland division of the Property Council of Australia, the RBA’s Deputy Governor Ric Battelino suggested that the home and commercial property finance markets show signs of life despite an overall slowing of credit growth.
Battelino stated that the Australian economy is growing around trend, while inflation remains within the RBA’s target range. “This is a comfortable position to be in,” Battelino said.
But in spite of the overall health of the economy, borrowers are still displaying caution, with credit growing at a moderate 7% over the past year and household savings on the rise. “All this is consistent with households taking a more cautious approach to their finances,” Battelino said.
According to Battelino, most of the growth in credit since 2005 has been due to households borrowing for housing, while credit card debt, personal loans and margin loans have remained fairly flat.
Addressing the home loan market, Battelino indicated the weakening of other areas of borrowing is not cause for concern for the RBA given the relative health of housing lending. “The current picture is one where borrowing for housing is broadly growing in line with income, house prices are stable and there is little appetite for other forms of debt,” he said. “From the Reserve Bank’s perspective, this seems to be a satisfactory state of affairs.”
Well unfortunately, we didn’t get much from IMF meetings held this weekend. The rhetoric was kinda there – finance ministers agreeing to cooperate on exchange rates and to hold further discussions (G20 meetings) in November. Agreement is going to be extremely difficult to achieve in practice though. The IMF and the US take the position that China’s FX reserve accumulation is responsible for global imbalances. Emerging nations for there part suggest that it isn’t the accumulation of FX reserves, but the Fed’s ultra loose monetary policy that is causing problems.
Regular readers will know my view – it is very clearly the Fed. I mean think about it. China didn’t force US consumers to gear up to their eyeballs taking out loans they couldn’t afford – maxing out their credit cards etc. Consequently, China is not responsible for either the GFC or the US trade deficit – for the global imbalances the US keeps going on about. Moreover when other nations intervene in FX markets, they are responding to the depreciation of the USD –caused entirely the Fed’s ultra loose policy and ongoing threats to print more money. They’re not responding to any action that China has taken.
The US doesn’t acknowledge any of this however, so it going to be difficult to discuss anything. In fact many US politicians spend their time ranting on about China – how they undermine US export opportunities and so take American jobs. Of course from their point of view, the yuan is just providing one enormous export subsidy. The fact that Chinese workers get paid about 1/10 of a US worker is apparently irrelevant.
In all of this I haven’t seen a figure the US would be happy with – it’s unclear just how much of a revaluation they want. So since 2005 we’ve seen something like 18%, which obviously hasn’t calmed US fears. Then again can anything assuage US fear? Back in the 80’s, a time when the US was attacking Germany and Japan about the value of their currencies, the US managed to convince the Japanese (the Plaza accord in ‘85) to a 40% appreciation of Yen over a 2 yr period. This by the by was a complete failure of a policy and did little to fix trade imbalances on a sustained basis (in fact the trade balance with both countries continued to deteriorate through the 90’s).
China’s rhetoric to date suggests they will be less amenable to such dramatic action. No doubt the Asian financial crisis of ‘97 is very fresh in their mind and consequently, they want to ensure that the Yuan appreciates only gradually and that they don’t freely float the currency prematurely. As we found out in 1997, the consequences of acting too early can be severe.
There is an important point behind all of this with serious implications for Australia. Namely, the Fed are probably going to print more money. If they can’t get an agreement with other countries to revalue their exchange rates, then they’ll force it upon them. This means the AUD will, in all likelihood, smash though parity. Now we know how this works – a higher AUD means less tourists, it means lower profits for other exporters including our miners etc etc. It means a lower terms of trade. Lower profits mean lower national income; it means smaller budget surpluses; all of which suggests lower economic growth for Australia – and lower inflation.
Magnitudes are obviously very difficult to work out and exchange rate impacts have generally become more muted as they say. Yet they’re not completely irrelevant – especially given the importance of the mining boom to future growth – and if the AUD continues to rise, there will be implications for monetary policy.
At this stage I’m leaving my forecasts as they are, but none of us should make any mistake – things are very fluid. So I’m sticking with 2 rate hikes this year predicated on an elevated Q3 CPI print, solid domestic growth data and a pick up in global growth. If all that happens but AUD is at $1.10 then make that 1 rate hike (maybe). Much depends on the Fed and note that the next meeting (at which they are expected to print) would be the day after the RBA’s meeting (November 5) which will make things very interesting, very close and obviously lifts the bar for a hike.
Leaving that for now and looking to the week ahead – data for Australia is reasonably light although under the circumstances quite important. Home lending data is released today (1130) and for mine this is a key indicator. Expectations are that loans will rise 1% in August (my forecast also). Other than that we get NAB’s business confidence measure (Tuesday, 1130) and Westpac’s consumer confidence update (Wednesday, 1030). Across the Tasman the kiwis put out August retail sales on Thursday (mkt at 0.3% me at 0.5%). For the rest of the region, keep a close eye on Chinese trade data on Wednesday.
US data includes the FOMC minutes (Tues morning), retail sales, CPI, Empire State index, Michigan confidence (all Friday night) and a whole bunch of Fed speakers (including Bernanke on Wednesday). Finally in Europe we get German and UK CPI and Euro zone industrial production. Otherwise check out the attached calendar.
Hope you have a great week…