Welcome
Welcome to this month's edition of the REIV Monthly Research Bulletin. There is some relief for mortgage holders as the Reserve Bank has decided to keep interest rates stable at a cash rate of 4.5 per cent for the second consecutive month. Though a welcome outcome for domestic homeowners, today's decision comes on the back of worries over European debt and the future of global growth.
REIV Members are welcome to provide opinions and requests for future releases. If you would like to contribute to this publication please email the REIV's research analyst Alex Turlea at aturlea@reiv.com.au.
Feature Story: Interest Rates
The Reserve Bank of Australia has decided to leave the cash rate unchanged at 4.5 per cent at its monetary policy meeting today. The comments below, extracted from the official RBA statement, elaborate on the reasons for the decision.
"The global economy grew faster than trend over the year to mid 2010. The expansion has been uneven, with the major advanced countries recording only moderate growth overall but growth in Asia and Latin America very strong. There are indications that growth in China is moderating to a more sustainable rate as policies are now less accommodating. Similar adjustments to policies and growth rates are occurring in other countries in the Asian region. In Europe, while output in some key countries has been improving significantly, prospects for next year are more uncertain given planned fiscal contraction. US growth was stronger in the first half of 2010 but the pace of labour market improvement has been slow and the expansion may be somewhat lacklustre in the second half of 2010. Overall, the Bank expects global growth to be about trend over the coming year."
"The caution evident in financial markets in the past few months has abated of late, helped by the disclosure of information about European banks. Nonetheless, the global outlook remains somewhat more uncertain than a few months ago and this is reflected in the volatility of financial prices. Commodity prices are off their peaks but those most important for Australia remain at very high levels, and the terms of trade are around their peak of two years ago."
"With the high level of the terms of trade expected to add to incomes and demand, output growth in Australia over the year ahead is likely to be about trend, even though the effects of earlier expansionary policy measures will be diminishing. Consumption spending is recording a modest increase at present, with households displaying a degree of caution, but most indicators suggest business investment will increase over the coming year. Business credit has stabilised, though credit conditions for some sectors remain difficult. Credit outstanding for housing has continued to expand, but the upward pressure on dwelling prices appears to have abated."
"The labour market has continued to firm gradually, and after the significant decline last year, growth in wages has picked up a little, as had been expected. Recent data for inflation were consistent with the Bank's May forecasts, with underlying inflation declining to about 2¾ per cent, the lowest rate for about three years. The rate of CPI increase was a little above 3 per cent due to the effects of increases in tobacco taxes announced earlier in the year. Through to mid 2011, underlying inflation is likely to be in the top half of the target zone, while CPI inflation will probably be just above 3 per cent for a few quarters due to the impact of the tax changes and increases in utilities prices."
"The current setting of monetary policy is resulting in interest rates to borrowers around their average levels of the past decade. With growth likely to be close to trend, inflation close to target and the global outlook remaining somewhat uncertain, the Board judged this setting of monetary policy to be appropriate."
Current Economic Conditions
Australia's labour market has continued to perform well, as June 2010 employment data showed that the national unemployment rate remained unchanged at 5.2 per cent, with the participation rate increasing slightly from 65.1 per cent to 65.2 per cent. Victorian unemployment also remained unchanged for the month at 5.4 per cent, with the participation rate falling slightly from 65.2 per cent to 65.1 per cent.
The Australian dollar was trading at 0.8986 US dollars at close of business on the 30th of July 2010, a depreciation of around 0.2 per cent since the start of this year. The Australian dollar also maintained its current pace against the Euro, trading at 0.6878 at close of business on the 30th. Positive investor sentiment towards economic outlook has lifted the Australian dollar in the past few days.
The Westpac - Melbourne Institute Consumer Sentiment Index increased by 11.1 per cent in July to 113.1 in seasonally adjusted terms, following three months of loses.
All five component indices increased in July, with the largest increase recorded by the component index reflecting family finances vs. a year ago (+17.2%), followed by the component index reflecting economic conditions next five years (+16.2%) and the component index reflecting economic conditions next 12 months (+10.0%). Overall, the current conditions index increased by 11.1 per cent and the expectations index increased by 11.0 per cent. This month's index comes on the back of news of the cash rate and unemployment rate remaining unchanged.
National retail turnover increased by 0.2 per cent for the month of June in seasonally adjusted terms following an increase of 0.2 per cent last month. Victorian turnover increased by 0.6 per cent in the month of June, following last month's 0.2 per cent increase. In trend terms, both the Victorian and Australian retail sectors posted modest growth of 0.5 per cent and 0.3 per cent respectively.
New motor vehicle sales decreased 1.2 per cent during June 2010 in seasonally adjusted terms following a revised 3.9 per cent decrease last month. The trend estimates have been re-introduced for all new motor vehicle sales. In trend terms, new motor vehicle sales increased 0.6 per cent for the month, which has been increasing since April 2009.
Housing Market Conditions
The Australian and Victorian housing markets have continued their strong performance this year. The Melbourne auction market had a clearance rate of 68 per cent in July and a clearance rate of 77 per cent for the calendar year so far. There have now been over 13,500 homes sold by auction, 41 per cent more than last year.
The number of total dwelling units approved in Victoria increased by 1.4 per cent in seasonally adjusted terms for the month of June 2010, following a revised decrease of 5.4 per cent in the previous month. The value of total dwelling units approved in Victoria decreased by 7.4 per cent to $1.58 billion dollars. In trend terms, the number of total units approved in Victoria decreased by 2.5 per cent for the month while the value of total dwelling units approved fell by 1.7 per cent.
Housing affordability in Victoria has decreased in the March quarter. The proportion of income required to meet monthly loan repayments has increased from 29.5 per cent to 32.6 per cent over the quarter, an increase of 10.5 per cent. The average monthly home loan repayment has increased by 10.6 per cent for the quarter, while the median weekly family income has increased by only 2.0 per cent.
The total value of owner-occupied housing commitments, excluding alterations and additions, for May 2010 decreased 1.3 per cent in trend terms, which is now the eleventh consecutive decrease. In seasonally adjusted terms, the total value of owner-occupied housing commitments decreased by 0.3 per cent following the previous month's 0.6 per cent increase. The total value of commercial finance increased in trend terms by 1.5 per cent and decreased by 1.1 per cent in seasonally adjusted terms. The value of total personal finance commitments decreased in trend terms by 0.6 per cent but increased by 0.1 per cent in seasonally adjusted terms.
The REIV market sentiment index decreased in June 2010, falling 22.0 per cent to 65.0 for the month. Six of seven components decreased for the month, bringing the index to the lowest it has been since July 2008. Key factors in the decrease in sentiment have been large decreases in the components representing number of enquiries received vs. last month (-45.8%) and estimate sale/lease prices vs. last month (-42.6%).
The Metropolitan Melbourne rental market tightened slightly in June 2010, with a vacancy rate of 1.5 per cent down from last month's 1.7 per cent. The inner-Melbourne rate tightened to 1.1 per cent from last month's 1.6 per cent. The middle-Melbourne rate remained unchanged at 2.0 per cent, while the outer-Melbourne rate also tightened to 0.8 per cent from 1.3 per cent last month.
