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Australia keeps interest rates on hold amid home building bonanza

Tuesday, October 4, 2016 - 12:16

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Australia's central bank left interest rates at 1.5 per cent on Tuesday as it weighs the effect of past easing and the biggest-ever boom in apartment building helps underpin economic activity and jobs growth.

[SYDNEY] Australia's central bank left interest rates at 1.5 per cent on Tuesday as it weighs the effect of past easing and the biggest-ever boom in apartment building helps underpin economic activity and jobs growth.

The Reserve Bank of Australia (RBA) surprised no one with its decision. All 57 economists polled by Reuters had expected no change this week after cuts in August and May.

The Australian dollar barely reacted to the news.

The RBA's new governor, Philip Lowe, also resisted any temptation to signal a bias to ease again saying only that an unchanged stance was "consistent with sustainable growth in the economy and achieving the inflation target over time."

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Market voices on:

Markets have been lengthening the odds of a cut since Mr Lowe recently signalled that he was comfortable with the economic outlook and reluctant to take rates ever lower.

In particular, Mr Lowe noted that a long slump in mining investment was past its worst and prices for some key commodity exports, notably coal and iron ore, had rebounded.

Interbank futures imply only a one-in-four chance of a cut by Christmas and have around 16 basis points of easing priced in for all of next year.

"We think the case for no more cuts is strengthening," says Paul Bloxham, chief economist Australia at HSBC. "Economic growth is strong, commodity prices have risen, and the drag from the mining investment decline is set to fade."

The economy expanded at an annual pace of 3.3 per cent in the year to June, in part thanks to a surge in home building that has some way to run yet.

Figures from the Australian Bureau of Statistics out earlier on Tuesday showed approvals to build new homes slipped only 1.8 per cent in August. Analysts had looked for a drop of around 7 per cent as payback for a 12 per cent jump in July.

APARTMENT LIVING

A generational shift to apartments and away from houses saw multi-unit approvals up over 26 per cent on August last year.

The shift is likely to make the building cycle longer than in the past simply because it takes much more time to complete apartment towers.

Such is the pipeline of new projects that the RBA has warned it could lead to a glut of unsold property and downward pressure on prices, particularly in Melbourne, Sydney and Brisbane.

Fearing eventual defaults, the major domestic banks have already stepped back from funding the apartment sector. Yet money has still been forthcoming from foreign banks and self-managed retirement funds.

Some pullback in home prices might not be unwelcome. Figures from property consultant CoreLogic out this week showed values in Sydney rising at an annual pace of 10.2 per cent, with Melbourne not far behind at 9 per cent.

Since the upturn began in mid-2012, prices across the capital cities have increased by 41 per cent.

The bonanza in home building has also created thousands of construction jobs and helped offset weakness in mining.

Australia's unemployment rate hit a three-year low of 5.6 per cent in August and leading indicators of labour demand point to further gains ahead.

Job advertisements, for instance, eased 0.3 per cent in September but that followed a 1.7 per cent jump the previous month, according to a survey from ANZ.

A recently released government measure of job vacancies climbed 4.5 per cent in the three months to August to reach a four-year peak.

REUTERS

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