RBA could halt mortgage increases thanks to record immigration
This is precisely what the September report delivers. Goldman Sachs economists commented that “composition was strong, with broad-based strength in cyclical and wage-sensitive service categories including housing, medical services, child care and auto repair.”
The Fed’s Preferred Proxy at The Wall Street JournalNick Timiraos, argued that “another uncomfortably high inflation reading for September is likely to keep the central bank on track to raise interest rates by 0.75 percentage points at its meeting this month. next” and “further increases the risk that officials will delay a planned slowdown as the pace of the rate rises next”.
Prior to the news, financial markets had been pricing the Fed’s top policy rate at around 4.6%, which they raised to 4.9%. Fed officials shocked investors at their last meeting when they raised their forecast terminal cash rate to 4.5%, and now there is every risk the Fed will start considering a handful of five to less. that the monthly inflation and labor market data obviously start to turn around.
Higher interest rates are positive for cash investors, but negative for virtually everything else. And dopey stock investors seem not to have fully digested the news. Them&The P 500 was only down 26% from its post-pandemic peak. After falling more than 3% on the inflation news, touching 3502 points, the market embarked on a bizarre five percentage point rally, breaking through 3700 points before the end of the session.
Different in Australia
There was no clear explanation for the huge bounce other than pundits indicating that put options were moving in-the-money and/or the index was moving into technical “oversold” territory.
While the Reserve Bank of Australia had until its October meeting sought to imitate the Fed’s measures, it ended up belatedly recognizing that local circumstances are radically different. Unlike the United States, the Australian housing market is booming while wage growth remains anemic despite the hysteria on the subject.
Streamlining one of the world’s most aggressive monetary policy tightening cycles, the RBA claimed it had private ‘linkage’ data that pointed to a much more worrisome picture of wage growth than official data. published by the Australian Bureau of Statistics.
And yet, when the RBA first released its linkage data, it showed wage growth very similar to the ABS figures – in particular, rising at a rate close to 3%, which is significantly lower. to the long-term historical trend and the 3 to 4% growth, according to the RBA, is necessary to generate sustainable inflation in its target range.
After forcing interest rates to rise 250 basis points in just six meetings (or over five months), Martin Place has begun to recognize that it makes sense to assess the devastating impact of what is a rise record share of borrowers’ income that is consumed by repaying the interest and principal of their debts.
This is in fact a shock of a similar magnitude to what the regulator has historically asked banks to estimate when stress testing borrowers’ ability to repay their debts in a scenario where they were subject to extreme increases in interest rates.
Another example where the Australian economy is different is the behavior of our housing market. In most other countries, the vast majority of debt is at fixed rates, and often fixed for terms of 20 to 30 years. In Australia, most loans are variable rate and adjust immediately to changes in the RBA’s cash rate, making its monetary policy moves more powerful.
While US house prices just recorded their first-ever post-pandemic monthly decline of just 0.3%, Australian house prices are collapsing at 16% a year. Specifically, home values in Australian capitals have fallen by more than 6.2% since their peak in May and are well on track to meet our forecast of a total loss of 15-25% from the peak. in the hollow.
In Sydney, home values have lost over 9.7% and are depreciating over 21% per year based on data for the last three months. Brisbane is not far behind with a similarly wild three-month annualized loss north of 19%. During the first half of October, Brisbane overtook Sydney as Australia’s worst performing capital.
Losses in Melbourne are more modest, melting at a lower annual rate of 13%. There is certainly no evidence that the bottom is in sight for what will be the biggest decline ever in the Australian property market.
A silver lining
The most positive thing that can be said is that the rate of decline in home prices nationwide appears to have stabilized at around 16%.
But that’s before borrowers feel the full impact of all the RBA’s interest rate hikes (which are only gradually being passed on by banks) and before Martin Place has (recklessly) hit households. with the additional rate hikes it signals.
A silver lining is that the RBA could be nearing the end of this cycle. If it raises rates an additional 50 basis points in November and December, its target cash rate will sit at 3.1%, well above its minimum neutral rate estimate of around 2.5%. This means that borrowers will have swallowed up an incredible 300 basis point rate hike in a very short time.
There is every chance that this unprecedented increase in the cost of borrowing will crush demand across the economy and eliminate the risk of the emergence of a wage/price spiral, which is obviously the objective of the RBA.
This dynamic will be reinforced by a huge increase in immigration, which this column has predicted for some time. In July 2021, we argued that “the opening of borders to flows of vaccinated and rigorously tested human capital, presumably after the March 2022 Federal Election, will precipitate a wave of skilled and much-needed overseas talent arriving in Australia”.
And it turned out. Our chief macro strategist, Kieran Davies, has documented the biggest quarterly increase in net overseas migration to Australia in over 20 years. This has been fueled by a record increase in the number of students returning to study in Australia, coupled with strong growth in the number of people on work or skilled visas.
With one of the lowest unemployment rates in half a century, the country desperately needs to attract more global talent to ease potential inflationary pressures. This should buy the RBA time to avoid raising its cash rate to the level of more than 4.1% currently set by the markets.