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Weighing a bubble against a slump


It'll be a good six months before the Reserve Bank even thinks about lifting interest rates. And while cheap mortgages are propping up property prices, don't expect great wonders from here on.

In his recent testimony to parliament, governor Glenn Stevens admitted he didn't know how long ''the period of stability'' in interest rates would be, which was unusually, perhaps alarmingly, frank but could also be seen as a clever way of staying non-committal without seeming unco-operative. If he doesn't know, he can hardly be accused of a backflip when he does.

Fast forward to the latest minutes of the Reserve's board meeting which say the pause will be ''for some time''. (By the way, it meets again today but nothing will happen.)

Not that I want to put words in the governor's mouth, but somebody has to. 

Besides, he dropped a big hint: rates won't move until the Reserve's economic forecasts change. Since these are only a few months old, that seems unlikely before the May budget and probably a while after it.

It's true most economic statistics of late have suggested things are improving, but then that's just what the Reserve has been predicting. It's also why the dollar is on the way up again, a critical consideration.

A fly in the ointment is inflation, which, improbably, jumped in the December quarter - a one-off from the dollar's drop from parity but enough to get currency speculators excited at the prospect of a rate rise.

The dollar ''remained high by historical standards'', the Reserve's board said on its last public outing. It has since risen, doing its bit to rub out some of the inflation it created.

While the dollar is rising, the Reserve Bank won't be inclined to lift rates, which would only push it even higher.

Then there's the fact that the US Federal Reserve has more or less put a six-month timetable on unwinding or ''tapering'' the extra money it's printing - we'll see how global markets cope without their sugar hit.

So with such a benign interest rate outlook, can property prices continue their momentum?

They should grow in line with household after-tax incomes, or at least no faster to be sustainable. With Australia's national income settling into growth of about 6 per cent annually, that must set the upper limit to how far prices can rise each year.

Even that's pushing it, considering the record amount of household debt, the fact that the growth in wages if you hadn't already noticed is subdued and barely keeping up with inflation, and unemployment is creeping up.

Oh, and let's not overlook the fact that values are indisputably high to begin with.

On top of that, rental yields are falling. Potential landlords might be after capital gains - all right, as is everybody else - but if the running yield is low it suggests Sydney or Melbourne prices are becoming over-extended.

Certainly they wouldn't withstand a rate rise when it comes.

Also supply, which has been constrained in Sydney though not elsewhere, is about to increase judging by the surge in building approvals. That can't be good for values.

Fortunately, while the Reserve Bank might hate the idea of a property bubble developing, it would be just as alarmed if values slid just as the economy is going through a transformation from mining investment into, well, investment in something else.

The last thing it would want while that's going on would be a property slump curtailing consumer confidence.

Read David Potts in Weekend Money every Sunday.

Read more: http://www.theage.com.au/money/investing/weighing-a-bubble-against-a-slump-20140401-35ur5.html#ixzz2xfs2M2Q7

Posted by David Potts - The Age on 2nd April, 2014 | Comments | Trackbacks
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