Australian Tipping Point? – Data is deteriorating rapidly

September 1, 2011

RBA and Interest Rates

Intellectually we like being right – that is the point of why we spend so much time investigating economies and markets and putting strategies and thoughts into practice. But the uncomfortable truth of the outlook at the moment is that there is no joy in seeing the Australian economy head in the direction that we believe is its destination.

Earlier this week we noted one of RBA Governor Glenn Stevens key comments from his opening statement to the House of Representatives Standing Committee on Economics was that

It would be reasonable to anticipate that a decline in confidence arising from the recent events internationally may well dampen demand  somewhat compared with the outlook set out in the Statement on Monetary Policy published in early August.

Unfortunately for all of us the RBA’s supposition is turning into fact as there is a clear deterioration in the most recent data coming though for July already. In truth this is just a continuation of the trend we have been pointing out for some time and which, in these particular series, has been occurring for months. But the worry, in the context of Governor Steven’s comment above is that  this deterioration is in data recorded even before these events would have had an impact on the outcomes.

Kicking off with new home sales earlier this week, we see a terrible fall of 8% in July following an 8.7% fall in June with the level of new home sales now sitting well below the low reached during the GFC. According to the HIA-JELD-WEN report detached house sales fell by 9 per cent in the month of July 2011 while sales of multi-units increased by 1 per cent. By state detached new house sales fell by 11.2 per cent in New South Wales, 7.8 per cent in Victoria, 8.5 per cent in Queensland, 1.5 per cent in South Australia, and 12.7 per cent in Western Australia.

We then got building approvals which posted a 1% gain after public approvals surged 77% from a month earlier with private sector approvals continuing to slide. Private sector approvals were down 0.6% with private housing approvals falling 0.2%, remaining in a clear downtrend while private non-housing or medium density approvals were down 1.4%

Then yesterday the bleak domestic picture continued with the RBA’s private sector credit aggregate showing the total outstanding debt only rose 0.2% over the month with business credit flat and personal credit continuing to fall. Housing credit was the only component to post a rise, increasing 0.4% however the annual rate of growth slowed further to 5.9%, its slowest pace since the series began in 1976 as appetite for borrowing remains low and household continue to pay down outstanding debt.

Finally we got the RP Data Rismark house price index which showed prices on a seasonally adjusted basis fell for the seventh straight month in July. Prices are now down 3.2% over the past 12 months and are off 3.7% from their peak in December 2010.

THIS NEXT CHART IS WORRYING BECAUSE OF ALL THE ASSOCIATED ECONOMIC IMPACTS – things like employment, family wealth (which we heard from the ABS is falling) and the general level of aggregate demand in the economy.

While the slow melt of falling house prices seems quite inconsequential to date the current pace of house price declines is actually outpacing the falls from the December 2007 peak before the RBA eventually cut rates and the government boosted the FHOG late in 2008. It is also outpacing the initial falls experienced in the US which then began to accelerate 12 months after prices peaked.

The outlook for house prices over the months ahead is equally troubling should the long-standing correlation, which is around 97%, between housing finance and house prices hold

The RBA is just trying to be upfront about the dangers to the economy but with confidence falling and uncertainty rising, unfortunately we suspect the economy is moving in the direction we have flagged. The RBA doesn’t want to cut rates, Glenn Stevens told us that again last week – unfortunately though the economy looks like it is going to take the decision out of his hands.

Lighthouse Research Team – Newcastle

Greg McKenna – still in Khao Lak Thailand – Swasdee 🙂

This blog is for information only and does not constitute advice. Greg McKenna and the Lighthouse Securities Research Team has not taken your personal circumstances, objectives or financial situation into account. Because of this you should, before acting on this information, consider its appropriateness, having regard to your objectives, financial situation or needs.

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