Australian economy update: Statement by Glenn Stevens, Governor Feb 2012

At its meeting today, the Board decided to leave the cash rate unchanged at 4.25 per cent.

Information becoming available since the December meeting confirms that economic conditions in Europe were weakening late last year, with risks still skewed to the downside. Reflecting this, most forecasters have lowered their forecasts for world GDP growth this year to a below trend pace. That said, recent data from the United States suggest a continuing moderate expansion after a soft patch in mid 2011. Growth in China has moderated as was intended, but on most indicators remained quite robust through the second half of last year. Conditions around other parts of Asia have softened. Commodity prices declined for some months to be noticeably off their peaks, but over the past couple of months have risen somewhat and remain at quite high levels.

The acute financial pressures on banks in Europe were alleviated considerably late in 2011 by the actions of policymakers. Much remains to be done to put European sovereigns and banks on a sound footing, but some progress has been made. Financial market sentiment, though remaining skittish, has generally improved since early December. Share markets have risen and term funding markets have re-opened, including for Australian banks, albeit at increased cost compared with the situation prevailing in mid 2011.
Information on the Australian economy continues to suggest growth close to trend, with differences between sectors. Labour market conditions softened during 2011 and the unemployment rate increased slightly in mid year, though it has been steady over recent months. CPI inflation has declined as expected, as the large rises in food prices resulting from the floods a year ago have been unwinding. Year-ended CPI inflation will fall further over the next quarter or two. In underlying terms, inflation is around 2½ per cent. Over the coming one to two years, and abstracting from the effects of the carbon price, the Bank expects inflation to be in the 2–3 per cent range.

Credit growth remains modest, though there has been a slight increase in demand for credit by businesses. Housing prices showed some sign of stabilising at the end of 2011, after having declined for most of the year. The exchange rate has risen further, even though the terms of trade have started to decline. This is largely a reflection of a decline in the euro against all currencies. Nonetheless, the Australian dollar in trade-weighted terms is somewhat higher than the Bank had previously assumed.

At today's meeting, the Board noted that interest rates for borrowers have declined to be close to their medium-term average, as a result of the actions at the Board's previous two meetings. With growth expected to be close to trend and inflation close to target, the Board judged that the setting of monetary policy was appropriate for the moment. Should demand conditions weaken materially, the inflation outlook would provide scope for easier monetary policy. The Board will continue to monitor information on economic and financial conditions and adjust the cash rate as necessary to foster sustainable growth and low inflation.

Kind Regards,
Rashesh Bhavsar
Financial Planner

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http://www.rba.gov.au/media-releases/2012/mr-12-02.html

Property Outlook Australia: Rate of decline in the Aussie housing market measured against the US, UK and NZ

Based on CoreLogic’s House Price Index (HPI), it’s been 69 months since the US housing market peaked.  Since the national index for ‘single family combined homes’ reached its high point back in April 2006, US home prices have fallen by 32.8%.

The first three years of US home prices coming down could be characterized as a reasonably steep downwards trajectory.  Using a compounding growth rate, between April 2006 and April 2009 the annual rate of decline averaged 11.4% or 30.5% overall.  Most of the home value destruction was over and done with in the first three years directly after the market peaked.  Home values have come down a further 1.9% year on year (on average) since that time.  Note, if you would like a complete run down on the US housing market, you can’t go past the ‘Market Pulse’ report from CoreLogic (January’s report was released last week).
Similarly, in the UK (based on the Halifax Index) the initial period of decline showed the steepest trajectory with home values falling by 10.5% per annum over the first 24 months post peak.
Using Property IQ’s House Price Index for New Zealand we can see a similar trend with the steepest trajectory of decline being recorded across the first 16 months after price peaked (down 9.6% over that period or 7.7% on an average annualized basis).
Looking at Australia, while there isn’t a long time series of data since the market peaked back in October 2010, values are down 3.8% in total (3.5% on an average annualized basis). The downwards trajectory in Australian dwelling values fits reasonably closely with the US trajectory over the same 13 month time frame (US prices were down 4.4% over the first thirteen months post peak compared with the 3.8% fall in the Australian market).  Six months later the US market was recording falls of 1-2% month-on-month as the US banking sector imploded, unemployment and mortgage defaults rose swiftly and the GFC spread around the world.
If the November results from the RP Data – Rismark Hedonic Index remain consistent (November month on month result was +0.1% s.a.) and we see another flat result for December, it may provide the best indication yet that the Australian housing market is flattening out.  The risk of a US style housing meltdown are looking increasingly remote.  The key factors to watch will continue to be interest rates and the labour market data.  With inflation tracking lower than expected, speculation about further rate cuts is likely to improve market sentiment.  In balance, unemployment is ticking upwards and the banks are looking unlikely to pass on any cash rate cuts in full.  Overall I think we can expect market conditions to remain reasonably flat over the first six months of 2012 at least.

Kind Regards,
Rashesh Bhavsar
Financial Planner

Book a no obligation consultation over the phone:
Call today on 03 9018 5534 or send an email to info@fortunewealth.com.au to book a no obligation consultation to find out your personalised wealth creation and wealth protection plans for you.

Fortune Wealth Creation Group
Ground Floor, 566 St. Kilda Road,
Melbourne VIC 3004
Phone no: 03 9018 5534
Email: info@fortunewealth.com.au
Source: http://blog.rpdata.com/2012/01/how-has-the-rate-of-decline-in-the-aussie-housing-market-compared-with-the-us-uk-and-nz/