March 2013 Property Market Update

As housing markets grow in strength I am again drawn to the issues and problems associated with the Reserve Bank’s single tool of economic management – the setting of the cash rate.

I have just completed an analysis on the economic circumstances and future of the housing markets for all states and territories in Australia as at the end of March 2013

The analysis reveals three groups of performers:

  1. Weak
  2. In need
  3. No need

The two particularly weak states economically are Tasmania and South Australia. Both have struggling housing markets and basically anything that would help lift their economic activity would be a blessing.

The second group is the ‘in need’ group of states. These states are Victoria, New South Wales and Queensland. While these are all improving, they would benefit from some stimulus via an interest rate reduction. Victoria is in the poorest position, followed by New South Wales and then Queensland.

Victoria has a dwelling oversupply problem and needs new industry to rejuvenate its economy. Interest rate reductions are not going have a great impact on this market because even with additional reductions affordability will not be solved.

New South Wales also has affordability issues but does not have the same housing supply issues as Victoria. NSW currently has a deficit in required stock. Coal and gas exploration, coupled with government expenditure on new infrastructure development, is regenerating the state’s economy. Interest rate reductions will help this market even though it is the most un-affordable market in Australia.

Following the natural disasters over the past couple of years, Queensland is finally regaining ground. Of the three ‘in need’ group of states it would move forward stronger than the others if a rate reduction came to pass. Queensland has the most affordable housing market of the group and given its resource base, it has the capacity to grow more strongly. In fact, there could be risks that parts of the state could boom and cause a housing bubble if there were significant interest rate reductions.

Finally, the third group of performers is the ‘no need’ state of Western Australia and the Northern Territory. Both of these markets have no need whatsoever for reduced interest rates and are on paths of strong growth. In fact, it is arguable that their current growth is too strong. These two areas could quickly become places where interest rate reductions cause significant problems and price bubbles.

There is a clear shortage of stock in Western Australia and a build-up of population numbers at the same time. It appears that problems in other states and constant positive news about job prospects here may be causing people to move to Perth. The increase in population at a time when there are housing shortages and a gradual increase in unemployment as the resource boom comes to a close could pose problems on its own. Should interest rates also be decreased and house prices bid up quickly, there could be a serious issue in the medium term.

All of the above makes it exceptionally hard to decide what the RBA should do with interest rates. I have often pondered what the alternative is to the blunt tool that the RBA has. In essence, I believe it should be retained; however, just as the government has set a range for inflation to be maintained I suggest a range in which the RBA is charged to keep our currency trading within should also be set. This is not a new idea as the RBA does enter the market on occasions to keep the currency at what it believes is an acceptable level.

If we take an objective view of the actions of the Japanese, Chinese and even the US and Germany it is clear that they are managing their exchange rates via various tools. These tools take the form of many disguises from bond issuing programs to holding together a community in the EU, which allows them to operate using a currency that is much lower in value than it would be if it were to stand alone.

Australia is a small nation and it seems silly to me to be doing what one might call “the right thing” when major nations of the world are not. As a nation, Australia needs to be competitive in all areas of activity and not just resources exports (even these activities are coming under pressure as manufacturing industries fail). Allowing the Australian dollar to climb to its current level is killing off manufacturing and business generally. It is time to get the RBA to manage the dollar within a sensible range, which is probably something between $US 0.70-0.90 to the Australian dollar.

by: John Edwards

Source: blog.residex.com.au