So with investment booming, the housing industry has been left behind, as we have seen in the building approvals for December and in the detail in the housing finance statistics.
The figures for construction work done in the final quarter and for 2007 added more confirmation midweek, so now the housing sector is going to be whacked by another rate rise from the RBA at a time when it doesn’t need one.
And the Federal Government is talking about using tax incentives to stimulate construction of new houses, and more ‘affordable’ homes for the public sector: a desireat odds with the reserve Bank’s hardline on monetary policy.
Retailing, the other great growth generator besides investment, is more exposed to higher rates (and rising petrol prices) but looking at the second half forecasts from Woolworths this week, there’s no sign of any damage to confidence.
In fact Woolies is lifting spending on new stores, renovations and other moves to around $1.8 to $2 billion (more investment, if you like) over calendar 2008 (and into 2009 in the case of the new credit card and card-based loyalty/petrol discount scheme).
While all investment is welcome, spending more on shops is probably not quite what the RBA had in mind as it rails against too much consumption putting too much pressure on scarce resources and productive capacity.
But looked at another way, the extra spending from Woolies (and that to come from Coles at Wesfarmers later in the year) will take up the slack in NSW and Victoria in the building industry, but pressure resources in Queensland and WA.
But the lift in spending by Woolies shows it is not troubled by the outlook or by the prospect of more rate rises, petrol price rises or a rise in unemployment (which is the only way the RBA can really engineer a slowdown outside of an external fall in demand for our resources).
Goldman Sachs JBWere said this week that the construction stats "add conviction to our view that following a hike next week, rates will remain on hold at 7.25% through 2008.
"Though the cash rate will likely have increased by a whopping 100bp in the 8 months to March, the December quarter construction data only partially incorporate the impact of the August hike.
"In our view, having lifted rates materially higher in a very short period of time, the RBA will now be wary of underestimating the lagged impact of these tighter financial conditions on activity.
"This is particularly evident in the residential sector, where activity is already very sluggish and the outlook quite gloomy following a dive in building approvals in January.
"We have become significantly more bearish on the short-term outlook for residential construction, given that mortgage rates now appear likely to be around 115bp higher over the 8 months to March.
"These markedly tighter financial conditions will compound already challenging affordability constraints (notably, rising house prices, development costs and taxes), preventing a meaningful pick-up in activity this year.
"In support of this, we note that building approvals posted their second-largest fall in 24 years in January, prior to a cumulative 40bp increase in mortgage rates in the month leading up to the RBA’s February meeting.
"Notwithstanding this gloomy short to medium-term outlook, we acknowledge that very strong fundamentals remain in place. On our estimates, annual housing starts are currently running around 25,000 below underlying demand.
"This, in turn, is contributing to rising house prices (12.3%yoy) and rents (6.4%yoy), which we expect will encourage investors back into the market in 2009 (and particularly if ongoing volatility in equity markets diminishes their attractiveness as an investment substitute)."
The strong rise in the value of the Australian dollar over the past month has seen the currency hit a near 24 year high.
That’s thanks to the weaker US dollar and financial investors pushing up most major commodities prices in the past four weeks.
Now dealers are again talking about the currency reaching parity with the US dollar, just as they were talking last November before the subprime credit crunch intervened and knocked high yield, high risk investments lower.
And with the Reserve Bank set to lift its cash rate to 7.25% next Tuesday, deals are getting positioned, perhaps to snatch some profits after the decision Tuesday afternoon.
But while this volatility is again gripping world markets, rates in the Australian money markets have again tightened, with yields on 180 day bank bills closing at 8.03%, the highest since 1995. Yields on 90 day bills hit 7.84%.
There’s now a gap of 0.84 to 1.03% between the RBA’s cash rate and the two key bank bill rates which are the basis for most bank funding of wholesale lending and deposit rates.
If rates go up next Tuesday it will mean we have experienced a 1.10% to 1.20% rise in interest rates in the last eight months, including four rises from the RBA, and including the one offs from the major banks to home loan and other rates.
The way the bank bill rates are going there’s new pressure on the banks for another out of sequence lift in rates, but after being bashed in January and earlier this month, they are a bit gun-shy.
But as Goldman Sachs pointed out, the housing sector is copping a pounding and that’s hurting affordability.
According to the Real Estate Institute of Australia the proportion of a family’s income spent on an average home loan rose to 37.4% in the December quarter from 36.6% in the September quarter.
The Institute said that’s the highest level recorded since it began measuring affordability 22 years ago.
Home-loan affordability has deteriorated across Australia, except in Western Australia.
The Institute said that families that are renting outl
