by David Bassanese

As widely expected, the Reserve Bank of Australia did not change interest rates this week and still appears comfortably on hold for the foreseeable future. In keeping with this unchanged stance, moreover, its usual post-meeting policy statement was virtually identical to that of the previous month. 

That said, the RBA did make some incremental changes worthy of note. For starters, it noted the recent weakening in the Chinese property market which it conceded is “a challenge in the near term” – I’ll say more on this later. As for Australia, developments over the past month have been mixed, though on balance the RBA likely views them as more encouraging than discouraging.

Of course, the big shock of the past month has been the jump in the unemployment rate to a 12-year high of 6.4 per cent. The RBA noted this “recorded” rise in unemployment, “despite some improvement in most other indicators of the labour market this year.” This suggests the RBA is receptive to the view that the recent jump in the unemployment rate could be a statistical quirk, which might be at least partly reversed in the next month or so. 

The RBA did not explicitly mention the ongoing slump in iron ore prices, but it did marginally beef up its jawboning against $A strength – by noting “it remains above most estimates of its fundamental value”, rather than simply indicating as in recent months that it “remained high by historical standards.” That said, the Bank refrained from re-introducing its earlier much tough rhetoric suggesting the $A was “uncomfortably high.” 

Either way, global traders don’t appear to be listening that much, and continue to hold the current comfortably move US90c. And adding insult to injury, the $A is firming against the Euro and Japanese yen as central banks for these weakening economies retain a strong bias to ease monetary conditions further.

The RBA did note more positive news for the economy, however, came in the form of further survey-based gains in corporate and consumer sentiment, suggesting “moderate growth in the economy is occurring.” Most other comments on the economy were unchanged, though the RBA removed a reference from the month earlier of house price growth being “slower this year than last year.”  

With house price gains – especially in Sydney and Melbourne – remaining especially strong, the RBA seems less confident a slowdown is already underway. While the RBA likely doubts house prices have reached bubble territory, continued solid gains of late – such as released by RP-Data this week - would make the Bank even more nervous about contemplating another interest rate cut anytime soon.

Incidentally, while on the subject of house prices, much commentary of late has focused on declining rental yields in investor driven markets such as Sydney and Melbourne, not to mention the lift in house prices relative to household income to the peak levels of earlier last decade. Yet given unusually low lending rates and the broad based “search for yield”, some decline in rental yields is far from surprising – as in the share market, investors are bidding down the yields they are prepared to accept in light of feeble returns elsewhere, such as in cash or bonds.

And with lending rates now lower than in 2003-04, house prices relative to income levels can likely push up further before affordability constraints again begin to kick in. Compared with the 2003 bubble, moreover, house prices gains in the current upswing remains more muted and more narrowly based on a State basis.  

Of course, it remains very likely house price will peel back in nominal terms once interest rates rise to more normal levels – but far from fearing a house price crash, to my mind this is simply part of the normal market cycle in today’s low interest rate and low inflation environment.

The same incidentally seems to apply in China. As the RBA noted in its Quarterly Statement released last month, China has experienced several house price cycles over the past decade - coinciding with changes in government policies. 

At this stage at least, the latest easing in Chinese house price growth appears yet another garden variety cycle – which, as before, might also end once the Government is satisfied enough steam has come out of the market and a broader loosing in credit conditions is allowed.

That said, given their effective underwriting of financing for many small developers through opaque non-banking channels, Chinese banks – and accordingly China’s financial stability - remain vulnerable should a larger property and land price correction take hold. It’s for this reason China’s property cycles are likely to remain carefully managed by Chinese authorities and we can only hope they don’t get it wrong.