ANZ predict 25bp home loan interest rate rise

We expect the RBA to raise the cash rate 25bp to 4.25% following next week’s Board meeting. Given the RBA’s increasing focus on the housing market, today’s data will provide further impetus for tightening sooner and stronger than was anticipated just a few months ago.

Today’s data indicate short-term volatility but persistent growth for the Australian economy. While retail trade and building approvals both fell in February in monthly terms, annual growth rates remain solid.  Meanwhile, house prices and private sector credit are both indicating strengthening demand and rebuilding inflation pressures.

Nominal retail sales plummeted 1.4% in February, unwinding all of the gains made in January (+1.1%).  In annual terms, retail sales are 3.4% higher, a step up from January’s 2.9% through the year growth.  Also note that January’s strong result was only revised slightly lower from an initial estimate of 1.2% MoM to 1.1% MoM.

A 1.7% fall in food retailing (around 40% of the total retail spend) accounts for most of this, however the largest falls were in department and clothing stores (both -3.9%).  Household goods retailing also fell (-1.3%). Bucking this trend, cafes, restaurants and take-away food sales continue to outperform, growing 1.8% in the month to be 12.2% higher over the year.

Part of the Feburary fall is likely attributable to retailer discounting, enabled by the strong Australian dollar.  Anecdotal reports (including by RBA Assistant Governor Lowe in his speech last week) have mentioned widespread discounting in the sector in recent months.  Next month’s quarterly volumes data will shed more light on the impact of discounting on nominal sales.

Nominal monthly turnover Feb-10 Jan-10 Feb-10
% change (seas adj) MoM MoM YoY
Food retailers -1.7 1.3 1.5
Household goods -1.3 0.6 2.8
Clothing & soft goods -3.9 2.7 1.1
Department stores -3.9 7.2 5.7
Other retailers -0.8 1.4 2.6
Cafes, res’nts & takeaway food 1.8 -3.4 12.2
Total retail sales – seas. adj. -1.4 1.1 3.4
Retail sales ex food – seas. adj. -1.2 1.0 4.8
Total retail sales – trend 0.1 0.2 4.7
Retail sales ex-food – trend 0.2 0.3 5.6

Private sector credit rose 0.4% in February to be 1.6% higher in annual terms. By component:

Housing credit rose by 0.7% in the month following a similar rise in January. Housing credit growth continues to show no sign of acceleration, despite strong growth in house prices. At least in the short term this provides the RBA with some comfort that the strong housing market isn’t yet contributing to an imbalance that could destabilise the economy over the medium term. However, this may not remain the case if demand for credit picks up in a meaningful way, particularly as the positive investment outlook and the high level of business confidence are likely to lead to continued gains in employment. Moreover, both auction clearance rates and consumer confidence is still at high levels. The risk is that as the recovery continues credit growth accelerates and the RBA is forced to raise rates in order to slow it down.

Business credit fell by 0.1% in the month after a similar decline in January. The large falls in business credit appear to have passed, but firms are still reluctant to leverage up again. Over the past 12 months business credit has declined by 7.6%. Anecdotes suggest that small business is still finding it reasonably difficult to access credit and this probably continues to weigh on the data. Moreover, small business usually lags large business as the business cycle turns up, so it’s not unusual that small business credit growth is weak at this stage.

Personal credit rose by 0.4% in February and 1.4% over the past 12 months. The large declines seen in 2008 and 2009 have passed as the equity market has rallied. A large part of the weakness in personal credit over this period was due to large falls in margin lending. However, the reasonably sluggish pace of growth suggests that households are unwilling to leverage up to spend on discretionary personal items and investment in the stock market at this point in time.

The number of residential building approvals fell a surprising 3.3% in February, after dropping 7.0% in January. Market expectations were for residential building approvals to increase 2.1% for the month in February.

Feb Jan Feb
Building approvals -3.3% -7.0% 34.2%

February building approvals data saw a fall in both private sector detached house building approvals (-0.9%) and other dwellings (apartments, units etc) decreased 10.9%. In value terms, building approvals fell 4.5% in February, with all of the fall ocurring in non-residential building activity
(-13.0%), reflecting the current weakness in this sector and in business investment growth more generally. For residential buidlings however, the value of new residential building approvals increased only 0.5% while the value of alterations and additions rose 6.2%.

This result indicates the residential building sector is continuing to feel the effect of last year’s rate rises and the lagging influence of the withdrawal of stimulatory policies. With the outlook for solid economic growth and continued population growth moving further into 2010, we expect continued tightness in the housing market, supporting house price growth. However, continued monetary policy tightening and supply pressures are expected to see building activity remain below levels required to meet underlying housing demand.

RP Data-Rismark figures show that national median dwelling prices increased by a solid 1.4% MoM in February to be up 12.7% over the past year. Dwelling price growth in Sydney was 2.6% in February, bringing annual price growth up to 12.3%.  Momentum remains strong in Melbourne, with prices surging 2.0% in February to be up an impressive 19.3% over the year. Darwin dwelling price growth was also strong, showing a monthly increase of 2.6% (19.7% YoY). In contrast, dwelling prices stalled for the month of February in Brisbane and Adelaide (0.0% monthly growth) while Perth posted another month of negative growth (-0.6%).

Home prices (Feb) MoM YoY Level
Sydney +2.6% +12.3% $519,000
Melbourne +2.0% +19.3% $480,000
Brisbane +0.0% +6.5% $437,000
Adelaide +0.0% +9.1% $385,000
Perth -0.6% +7.5% $475,000
Hobart n/a n/a $325,000
Darwin +2.6% +19.7% $480,000
Canberra -0.8% +14.7% $540,000
Australia +1.4% +12.7% $455,000

While dwelling prices are expected to moderate into 2010 as first-homebuyer demand continues to fade and interest rates rise, market momentum to date remains strong and continues to present upside risk to our house price forecasts. Moving into 2010, growing consumer and investor confidence is expected to fuel demand from investors and upgraders, filling the (temporary) void left by first homebuyers and continuing to push prices upwards.

Source ANZ Economics


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