The Reserve Bank will be feeling a little more vindicated now that its campaign to break the back of inflation continues to bear fruit.
All the moaners and groaners complaining of being ‘stressed’ by high debt levels and high interest rates (but strangely not those such as pensioners and others with big cash balances or a conservative investment approach) should know that with each report of a slowing in demand, a rate cut comes that much more closer.
Economists at Merrill Lynch, who have long been tipping a rate rise next month, yesterday completed their change of tack by telling clients that we are now in for a prolonged period of steady interest rates at the current level.
That was before the housing finance figures for February provided the major shock, just like the retail trade figures did 10 days ago and the consumer confidence figures for April last week.
Housing finance suffered a sharp dip in February, amid the turmoil in the financial markets and the central bank’s first rate rise of 2008.
February was the month when the RBA stepped up its anti-inflationary attack with several speeches and commentaries in publications warning that rates would have to rise and go on rising until inflationary expectations were broken and demand slowed to curb inflationary pressures and capacity constraints.
Consumers and home buyers have obviously heeded the call and heeded it faster than even the RBA thought possible.
The speed of the slowdown in activity in retailing and housing, two key areas of demand in recent years, does make you wonder if the bank’s last rate rise in March was one too many.
Figures from the Australian Bureau of Statistics yesterday showed that the number of loans to people to build or buy homes or apartments dropped 5.9% in February, compared to January.
Market economists had been tipping a small gain of around half a per cent, so they were well wide of the mark. Even those economists who saw no change from January (as some were) were also well wide of the mark.
The total value of lending fell 7.1% in the month: lending to owner-occupiers fell 6% to $14.9 billion, and the value of lending to investors, who plan to rent or resell homes, slumped 9.5% to $6.55 billion (which is bad news for the rental market).
The ABS said the total value of owner-occupied housing commitments (seasonally adjusted) fell by 6.0% (down $952m) in February 2008, following a revised 2.3% rise in January.
"The decrease this month was due to falls in purchase of established dwellings excluding refinancing (down $808m or 8.3%), refinancing of established dwellings (down $160m, 3.6%) and purchase of new dwellings (down $2m, 0.3%). This was slightly offset by a rise in construction of dwellings (up $17m, 1.4%)."
The number of loans to build new houses advanced 0.6% and the number of loans to buy newly built dwellings rose 0.3%, but they were minor moves. Refinancings, which have been a major factor in home loan growth for the past eight months, slowed as fewer people moved to refinance their non bank lender mortgages with the likes of the NAB of Westpac.
With retail sales down in February, and on an easing trend for three to four months, building approvals turning down and consumer confidence at a 15 year low, the RBA’s campaign is obviously biting.
The Reserve Bank of Australia has raised its key cash rate four times since August last year, including back-to-back monthly increases in February and March, in an attempt to cool domestic demand and subdue inflation pressures.
Refinancings had risen at an annual rate of almost 24% in the three months to January, but they fell sharply as well in February.
Housing credit has been running at 9 year lows of around 11.4% in the past nine months. The February figures are pointing to an even sharper fall, which will no doubt see growth in personal credit fall as well.
The ABS reported:
The total value of dwelling commitments excluding alterations and additions (seasonally adjusted) decreased 7.1% in February 2008 compared with January 2008. The trend series for total value of dwelling finance commitments decreased by 0.2% in February 2008.
The total value of owner occupied housing commitments (seasonally adjusted) fell by 6.0% (down $952m) in February 2008, following a revised 2.3% rise in January 2008. The decrease this month was due to falls in purchase of established dwellings excluding refinancing (down $808m, 8.3%), refinancing of established dwellings (down $160m, 3.6%) and purchase of new dwellings (down $2m, 0.3%). This was slightly offset by a rise in construction of dwellings (up $17m, 1.4%). The trend series in the value of owner occupied commitments decreased by 0.2% in February 2008.
The total value of investment housing commitments (seasonally adjusted) decreased by 9.5% (down $685m) in February 2008 compared with January 2008, following a revised increase of 8.8% in January 2008.
The decrease this month was due to decreases in Construction of dwellings for rent or resale (down $517m, 47.1%) and Purchase of dwellings by individuals for rent or resale (down $240m, 4.5%) this was partially offset by a rise in Purchase of dwellings by others for rent or resale (up $72m, 9.1%).
The trend series in total value of investment housing commitments decreased by 0.2% in February 2008.
The number of owner occupied housing commitments (seasonally adjusted) decreased by 5.9% (down 3,977) in February 2008 compared with January 2008, following a revised increase of 3.1% in January 2008.
Decreases were recorded in purchase of established dwellings excluding refinancing (down 2,748, 7.1%), refinancing of established dwellings (down 1,263, 5.7%),
