ANZ Australian Macro Weekly | Housing unexpectedly shows renewed strength

4 min readSep 5, 2016

Housing unexpectedly shows renewed strength.

“Supervisory measures have strengthened lending standards in the housing market [and] … a number of lenders are … taking a more cautious attitude to lending in certain segments.
The most recent information suggests that dwelling prices have been rising only moderately over the course of this year, with considerable supply of apartments scheduled to come on stream over the next couple of years, particularly in the eastern capital cities. Growth in lending for housing purposes has slowed a little this year.
All this suggests that the likelihood of lower interest rates exacerbating risks in the housing market has diminished.” (Statement by Glenn Stevens, Governor: Monetary Policy Decision, 2 August 2016).

Economic overview

When the RBA cut rates in August, it thought that the likelihood of lower interest rates exacerbating risks in the housing market had eased. We held a similar view, although we are now less sure given renewed strength in approvals, clearance rates and prices, making us think that the RBA will temper its assessment.
Longer term, we think the RBA will remain concerned about the feedback from weak rents to inflation, especially given the unprecedented supply of apartments that comes online over the next two years.

Markets Strategy

Rates: The RBA meets next week for Glenn Stevens’s last meeting as Governor. No change to the cash rate is widely expected and the focus will be on forward guidance. We expect the RBA will indicate a mild, but not pressing, easing bias. With a touch over 25bp of cuts priced into the OIS curve over the next year, the forward guidance is unlikely to be more dovish than current pricing, but, at the same time, it is unlikely to drive its unwind.
FX: Typically a week like the one to come would feel momentous for the AUD. The payrolls report is out on Friday night and then next week there is the RBA and GDP report in Australia. Yet somehow it does not feel like the fate of the AUD, in a medium-term sense, is about to be decided. See the Strategy Weekly.

What to watch

RBA (6 Sep): We expect no change in rates and the retention of an easing bias.
GDP (7 Sep): GDP should grow more slowly, up 0.3% after an outsized gain of 1.1% in Q1, where the volatility in growth has been driven by net exports.

The ANZ Heatmap

When the RBA cut rates to a new record low of 1.5% in August, it thought that the likelihood of lower interest rates exacerbating risks in the housing market had eased.
At the time, we held a similar view, although we are now less sure given that the latest data show renewed strength in housing, with approvals, clearance rates and prices all higher. [adrotate group=”16"]
This strength leads us to expect the RBA to temper its assessment of the housing market a little, either in the policy press release for the 6 September board meeting and/or the subsequent minutes.
Longer term, though, we think that the RBA will remain concerned about the feedback from weak rents to inflation, especially given the unprecedented supply of apartments that come on line over the next two years.
We think a marked impact on rents is likely given most apartments are rented and with rents being the second-largest component of the CPI basket (there may also be an indirect effect on project home prices, which are the largest item in the CPI).
Accordingly, we think that the latest strength in the housing market is unlikely to change the RBA’s strong easing bias.
This interpretation is reinforced by the last interview Governor Stevens gave before his term finishes on 17 September, where he discussed the risks around housing and the decision to cut rates in August.
He said, “the job isn’t to avoid all risk at one end of the spectrum and thereby run too many risks at another point, [but rather] … to try to find a reasonable balance between all [risks]”.