As the Reserve Bank board debates whether to lower rates again today, policymakers may well reflect on the mistake, in hindsight, of not lowering interest rates in 2014.
As recently as November, economists expected rate hikes, and it seems clear that strong gains in home prices in 2013 and 2014 in Sydney and Melbourne in particular delayed the current monetary easing cycle, finally kickstarted in February.
The cost and harm to the broader economy of that delay is only being revealed now.
Capital investment is at its lowest in three years and is set to deteriorate further, with business investment set to fall at its most rapid pace since the last recession.
Picking the precise moment to stimulate after the mining boom was never going to be easy. And for a long time, Australia’s accelerating property prices have stymied monetary policy.
But CoreLogic RP Data figures on Monday are fodder for the doves. While Sydney home values rose 1.4 per cent in February to be up 13.7 per cent from a year earlier, Melbourne posted a meagre 0.2 per cent rise and values in Perth, Brisbane and Hobart fell.
With even Melbourne dropping off the property bandwagon, only Sydney has visibly reacted to the February cut to record lows in mortgage rates.
Elsewhere, the response has been muted, underscoring Glenn Stevens’ observation last month that “monetary policy's power simply to summon up more demand with lower interest rates could be less than it used to be”.
Australia (ex-Sydney) could have used a weaker Australian dollar much sooner, and the extended period the currency remained stimulated by Australia’s large yield-premium has undoubtedly slowed the pace of rebalancing. That forced the RBA to push forward its forecasts in recent weeks and finally inject some stimulus with its belated 25 basis point easing.
Economists unanimously expect further cuts by May, with most tipping a follow-up reduction in the cash rate today.
“I just get the impression that monetary settings in Australia are too tight,” says AMP’s Shane Oliver. “The broader economy needs help.”
The rate of Sydney’s property price growth had lagged for 10 years or so, and recent outperformance can be considered a catch-up.
The NSW economy -- which is more diversified and less dominated by manufacturing, tourism or resources than other states -- is on the up, and the feel-good factor is translating into property price gains not matched elsewhere.
Seven-year highs in the sharemarket don’t hurt, and the electorate appears to be politically comfortable again after Barry O’Farrell’s spectacular resignation over a $3,000 bottle of Grange 11 months ago. Polls suggest the Liberal regime in NSW will be returned later this month, in sharp contrast to Victoria and Queensland.
All this won’t stop the RBA putting the needs of the wider economy ahead of the risk of a single-city property bubble. The bank attracted criticism around a decade ago as it raised rates while the NSW economy slowed, so there is a precedent of ignoring Sydney-specific needs.
If Sydney’s property values do indeed turn out to be a bubble, and it bursts, it will adversely affect recent home buyers and it may also affect some banks. So it is dangerous to push even an isolated pocket of price anomaly too far, even if it is just one city.
For now though, CoreLogic says Sydney’s rental yields are better than Melbourne’s, suggesting the market is not the most stretched -- yet. And Stevens has alluded to the fact he would let prudential measures tackle overzealous borrowing, the RBA February meeting minutes saying only that developments in housing “bear careful monitoring.”
With China, Canada, Japan and the ECB stepping up monetary stimulus, and the US dragging its heels on much-touted monetary tightening, the RBA is under pressure to reduce the yield gap to avoid undoing the Australian dollar’s decline.
So longer term, adjustments to stamp duty and first homebuyer grants may have to come into play to offset stimulus to property investors from a sub 2 per cent cash rate. And the May budget may bring fiscal tightening, which would partially offset stimulus measures.
Sydney’s hot property market won’t stop the RBA cutting rates, either today or next month.
A much tougher challenge will be when the time comes to lift rates in an economy so broadly leveraged to housing.