the economy, interest rates and housing markets in 2005 … · 1 economics@ the economy, interest...
TRANSCRIPT
1 economics@
The economy, interest rates and The economy, interest rates and housing markets in 2005housing markets in 2005--0606
Presentation to a luncheon for Presentation to a luncheon for UDIA QueenslandUDIA Queensland
Saul EslakeSaul EslakeChief EconomistChief EconomistANZ BankANZ Bank
Brisbane ConventionBrisbane Convention& Exhibition Centre& Exhibition Centre
77thth October 2005October 2005
www.anz/com/go/economicswww.anz/com/go/economicswww.anz/com/go/economics
2 economics@
Key assumptions about the world economyKey assumptions about the world economyKey assumptions about the world economy
Expensive oil is here to stay– crude oil prices will probably stay close to US$70/barrel near
term, and will still be in the $55-65 range through 2006-07World economic growth is slowing from 5% in 2004 to around 4¼% pa in 2005 and 3¾-4% in 2006 and 2007
– higher oil prices and higher US interest rates to have some dampening impact – but much less than in previous ‘oil shocks’
– although most economies will slow a bit, note that Japan is actually picking up after more than a decade of stagnation
The Fed will continue to raise US short-term interest rates ‘at a measured pace’, reaching 4½ % by mid-2006The US$ has bottomed (for the time being) against the euro and other ‘freely floating’ currencies (including the A$)
– US now has the highest, not the 2nd lowest, interest rates among major economies
– confidence in the euro undermined by political developmentsAsian central banks will continue to resist significant revaluations of their currencies
– China’s abandonment of its US$ peg does not mean than the yuan will rise significantly against the dollar
3 economics@Sources: Datastream; OECD; Economics@ANZ.
Higher oil prices aren’t (thus far) leading to higher inflation and interest ratesHigher oil prices aren’t (thus far) leading to Higher oil prices aren’t (thus far) leading to higher inflation and interest rateshigher inflation and interest rates
Oil prices and inflation
Note: Shaded areas denote “oil price shocks”
0
10
20
30
40
50
60
70
80
90
100
70 75 80 85 90 95 00 050
2
4
6
8
10
12
14
16US$ per barrel(2005 prices)
Real oil prices
% change fromyear earlier
G7 consumer prices (right scale)0
10
20
30
40
50
60
70
80
90
100
70 75 80 85 90 95 00 050
2
4
6
8
10
12
14
16US$ per barrel(2005 prices)
Real oilprices
% per annum
G7 3-mth interest rates(right scale)
Oil prices and interest rates
4 economics@
Economic growth has been much less affected by higher oil prices than in previous ‘oil shocks’Economic growth has been much less affected Economic growth has been much less affected by higher oil prices than in previous ‘oil shocks’by higher oil prices than in previous ‘oil shocks’
Oil prices and economic growth
Note: Shaded areas denote oil price ‘shocks’.Source: Thomson Financial Datastream; OECD.
0
10
20
30
40
50
60
70
80
90
100
70 75 80 85 90 95 00 05-2
-1
0
1
2
3
4
5
6
7
8US$ per barrel(2005 prices) Real oil price
(left scale)
Real % changefrom year earlier
OECD GDP growth(right scale)
5 economics@
In the developing world, gross saving has risen much more than gross investmentIn the developing world, gross saving has risen In the developing world, gross saving has risen much more than gross investmentmuch more than gross investment
Source: Bank for International Settlements, 75th Annual Report.
21
22
23
24
25
26
1990-99
2000-02
2003 2004
% of GDP
World
12
14
16
18
20
22
1990-99
2000-02
2003 2004
% of GDP
United States
Euro area
16
18
20
22
1990-99
2000-02
2003 2004
% of GDP
22242628303234
1990-99
2000-02
2003 2004
% of GDP
Japan
Developing Asia
25
30
35
40
1990-99
2000-02
2003 2004
% of GDP
16
18
20
22
1990-99
2000-02
2003 2004
% of GDP
Latin America
Saving Investment
6 economics@
Higher saving by developing economies is allowing (forcing?) the US to run big deficitsHigher saving by developing economies is allowing Higher saving by developing economies is allowing (forcing?) the US to run big deficits(forcing?) the US to run big deficits
‘Net lending’ is gross saving minus gross investment. It is conceptually equal to the current account balance.Source: BIS; Economics@ANZ.
-8
-6
-4
-2
0
2
1990-99
2000-02
2003 2004
% of GDP
United States
Euro area World
Japan
Developing Asia
Latin America
-1
0
1
2
1990-99
2000-02
2003 2004
% of GDP
0
1
2
3
4
1990-99
2000-02
2003 2004
% of GDP
-2
-1
0
1
2
3
1990-99
2000-02
2003 2004
% of GDP
-3
-2
-1
0
1
2
1990-99
2000-02
2003 2004
% of GDP
-2
-1
0
1
1990-99
2000-02
2003 2004
% of GDP
Net lending as a % of GDP
7 economics@
0
1
2
3
4
5
03 04 05
% pa
Fed funds(cash) rate
10-year bond yield
8
10
12
14
16
18
20
79 80 81 82
% pa Fed funds (cash) rate
10-yearbond yield
Strikingly, US long-term rates have fallen even though US short rates have more than trebledStrikingly, US longStrikingly, US long--term rates have fallen even term rates have fallen even though US short rates have more than trebledthough US short rates have more than trebled
Four episodes of rising US interest rates
Note: Shaded areas show periods when the Federal Reserve has been tightening monetary policy by raising the ‘Federal funds’ (cash) rate. Sources: Datastream; Federal Reserve
6
7
8
9
10
11
88 89 90
% pa Fed funds (cash) rate
10-yearbond yield
23456789
93 94 95
% pa
Fed funds(cash) rate
10-year bond yield
Unlike Australia, in the US most personal and business borrow-ing is done at fixed rates
Thus, what happens to long-term rates is much more important
Usually, long-term rates rise while the Fed is tightening monetary policy
But in this latest episode, long-term rates have fallen
8 economics@
-15
-10
-5
0
5
10
15
20
1900 1910 1920 1930 1940 1950 1960 1970 1980 1990 2000
% change from previous year
(f)
Australia is enjoying its longest run of uninter-rupted economic growth since FederationAustralia is enjoying its longest run of uninterAustralia is enjoying its longest run of uninter--rupted economic growth since Federationrupted economic growth since Federation
Australian real GDP growth, 1901 - 2006Australian real GDP growth, 1901 - 2006
Note: data are for financial years ended 30 June.Sources: Angus Maddison, Monitoring the World Economy 1820-1992; Reserve Bank; ABS; Economics@ANZ.
25 quarters of negativegrowth in this period,
including 6 episodes of2 or more consecutivequarters of –ve growth
3 qtrsof –vegrowthin thisperiod
2 qtrsof –vegrowthin thisperiod
no quarterly data before 1959
9 economics@
Capacity utilization
Sources: ABS; National Australia Bank;Economics@ANZ.
8090
100110120130140150160
00 01 02 03 04 05
'000
Job vacancies
After 15 years of continuous growth Australia’s economy is starting to run into capacity limitsAfter 15 years of continuous growth Australia’s After 15 years of continuous growth Australia’s economy is starting to run into capacity limitseconomy is starting to run into capacity limits
Labour shortages
0
5
10
15
20
25
00 01 02 03 04 05
%
Businesses reporting labour shortages as aconstraint on output
Highest in 26-year history of
this series
Edgeddownfrom15-yrhigh
Highestin the15-year history of this survey
5.0
5.5
6.0
6.5
7.0
7.5
00 01 02 03 04 05
% of the labour force
Actual
Trend
Unemployment rate
Lowest since Nov 1976
Sources: ABS; National Australia Bank;Economics@ANZ.
78
79
80
81
82
83
00 01 02 03 04 05
%
Actual (seas. adj. by ANZ)
Trend
10 economics@
Wage and price pressures are beginning to pick up although A$ strength is offsetting some of thisWage and price pressures are beginning to pick up Wage and price pressures are beginning to pick up although A$ strength is offsetting some of thisalthough A$ strength is offsetting some of this
Sources: Dept of Employment & Workplace Relations; ABS.
Wage price index
Enterprise bargaining settlements Producer prices
-15
-10
-5
0
5
10
97 98 99 00 01 02 03 04 05
% change fromyear earlier
Domesticallyproduced
Imported
Consumer prices*
-1
0
1
2
3
4
5
97 98 99 00 01 02 03 04 05
% change from year earlier
'Non-tradeables'
'Tradeables'2.0
2.5
3.0
3.5
4.0
4.5
5.0
00 01 02 03 04 05
% change from year earlier
Public sector
Private sector
2.5
3.0
3.5
4.0
4.5
5.0
00 01 02 03 04 05
Average % increase,all current agreements
Private sector
Public sector
11 economics@
The economy is near the point in the cycle where the seeds of previous recessions have been sownThe economy is near the point in the cycle where The economy is near the point in the cycle where the seeds of previous recessions have been sownthe seeds of previous recessions have been sown
Allowing wages to grow faster than justified by productivity in a tight labour market
– much less of a risk now that centralized wage fixation is (almost) dead
Failing to allow the Reserve Bank to raise interest rates before inflation has begun to accelerate
– not a serious risk now that the RBA is ‘independent’
‘Giving away too much’ of the revenue dividend in spending increases and tax cuts
– still a significant risk (as demonstrated in 2004)
In some important respects the Australian economy is at a similar stage to where it was in 1960, 1973, 1981 and 1989 – just before each of the past 4 recessions
Three policy mistakes have traditionally been made at this stage of the business cycle -
12 economics@
Australian governments are rolling in cash thanks to sustained strong growthAustralian governments are rolling in cash thanks Australian governments are rolling in cash thanks to sustained strong growthto sustained strong growth
Tax revenue as a pc of GDP
Sources: ABS; Australian Government Budget Papers.
Budget balances
20
22
24
26
28
30
32
34
70 75 80 85 90 95 00 05
% of GDP
-8
-6
-4
-2
0
2
4
70 75 80 85 90 95 00 05
% of GDP (fiscal years ended 30 June)
Federal government
Consolidated'generalgovernment'
13 economics@
In 2004 Federal outlays grew 10¾% in real terms – the fastest in over 20 years In 2004 Federal outlays grew 10¾% in real In 2004 Federal outlays grew 10¾% in real terms terms –– the fastest in over 20 years the fastest in over 20 years
* ie, excluding payments to State & local governments.Source: ABS, quarterly national accounts; Economics@ANZ.
Government outlays (excl. defence and interest)
-5
0
5
10
15
20
74 77 80 83 86 89 92 95 98 01 04
Federal own-purpose*
State & local
Real % change from previous year
14 economics@Sources: ABS; Reserve Bank; Economics@ANZ.
Capital city house prices
Household saving rate
-5
0
5
10
15
20
97 98 99 00 01 02 03 04 05
% change fromyear earlier
Household net worth
4.5
5.0
5.5
6.0
6.5
7.0
97 98 99 00 01 02 03 04 05
Multiple of annual householddisposable income
Household debt
-4
-2
0
2
4
6
8
97 98 99 00 01 02 03 04 05
% of householddisposable income
Actual
Trend
Australia’s property boom has ended with a sigh, not a bang: but its passing will dampen spendingAustralia’s property boom has ended with a sigh, Australia’s property boom has ended with a sigh, not a bang: but its passing will dampen spendingnot a bang: but its passing will dampen spending
5
10
15
20
25
97 98 99 00 01 02 03 04 05
% change from year earlierMortgage
Other
15 economics@
-4
-2
0
2
4
6
8
00 01 02 03 04 05 06 07
% pt contrbn to annual change in GDP
Domesticspending
Net exports
0
1
2
3
4
5
00 01 02 03 04 05 06 07
% ch. from year earlierAvge of last 10 yrs
4
5
6
7
8
00 01 02 03 04 05 06 07
% ch. from year earlier
-8-7-6-5-4-3-2-10
00 01 02 03 04 05 06 07
% of GDP
Australia’s economy will grow more slowly over the next few years than over the past decade Australia’s economy will grow more slowly over Australia’s economy will grow more slowly over the next few years than over the past decade the next few years than over the past decade
Sources: ABS; Economics@ANZ.
Real GDP growth
Drivers of GDP growth
Unemployment rate
Current account balance
16 economics@
4.0
4.5
5.0
5.5
6.0
6.5
01 02 03 04 05 06 07
% pa
90-day bill yield
Cash rate
Short-term interest rates
Australian cash rate is ‘on hold’ for the rest of 2005 but the next move will likely be upAustralian cash rate is ‘on hold’ for the rest of Australian cash rate is ‘on hold’ for the rest of 2005 but the next move will likely be up2005 but the next move will likely be up
The RBA’s August Monetary Policy Statement dropped the previous mild tightening bias (‘it would be surprising if rates did not move higher before the current expansion ends’) …… and indicated that it saw the probabilities of the next change in rates being up or down as being equalIt’s hard to see anything which would cause the RBA to alter its ‘no change’ view on rates over the rest of 2005 …… although on our forecasts its easier to see changes which would cause the next move in rates to be up (in particular, labour costs and the A$) than downSources: Datastream; Economics@ANZ.
17 economics@
Somewhat unusually, fixed rates are now significantly lower than variable ratesSomewhat unusually, fixed rates are now Somewhat unusually, fixed rates are now significantly lower than variable ratessignificantly lower than variable rates
Sources: RBA; Economics@ANZ.
2
3
4
5
6
7
8
9
00 01 02 03 04 05 06
% pa
Standard variablemortgage rate
3yr fixed mortgage rate
3-year swap yieldsand fixed-rate mortgages
2
3
4
5
6
7
8
00 01 02 03 04 05
% pa
US
Australia
3 year fixed mortgage rate
Fixed and floatingmortgage rates
18 economics@
Housing activity has been remarkably little affected by the rises in rates since late 2003Housing activity has been remarkably little Housing activity has been remarkably little affected by the rises in rates since late 2003affected by the rises in rates since late 2003
Housing finance commitments*
- owner occupiers
4
5
6
7
8
9
00 01 02 03 04 05
$ bn per monthTrend
Actual
60
80
100
120
140
160
00 01 02 03 04 05
'000s (annual rate)
Trend
Actual
Residential building approvals- private houses
* Excl. re-financing. Sources: ABS; Economics@ANZ.
2
3
4
5
6
7
8
00 01 02 03 04 05
$ bn per month
Trend
Actual
Investors
20
40
60
80
100
00 01 02 03 04 05
'000s (annual rate)
Trend
Actual
Units
19 economics@
There’s no real evidence of an ‘over-supply’ of housing, at least not in aggregateThere’s no real evidence of an ‘overThere’s no real evidence of an ‘over--supply’ of supply’ of housing, at least not in aggregatehousing, at least not in aggregate
Rental vacancy rates*
2
3
3
4
4
5
90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05
% (moving annual median)
Residential rents *
125
150
175
200
225
250
90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05
$ per week 3br houses
2br apartments
Rental yields *
2
3
4
5
6
7
90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05
% pa (moving annual median)
3br houses
2br apartments
Apartment construction
10
20
30
40
50
60
70
90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05
'000s Under construction
Completions(annual rate)
* Weighted average of all 8 capital cities.Source: Real Estate Institute of Australia; ABS.
20 economics@
-20
0
20
40
60
80
94 95 96 97 98 99 00 01 02 03 04 05 06 070
20
40
60
80
100
120
140
160
180
200'000 units'000 units
Underlying requirements(right scale)
Completions(right scale)
Surplus
"Short-age"(left
scale)
"Surplus"(left scale)
National housing market balance
Housing supply and demand fundamentals remain reasonably soundHousing supply and demand fundamentals Housing supply and demand fundamentals remain reasonably soundremain reasonably sound
Note: ‘Surplus’ or ‘shortage’ is the cumulative difference between completions and underlying demand from an historical starting point. The direction of movements in this measure is more significant than the level. Sources: ABS; Economics@ANZ.
Underlying demand for housing is running at around 165K units pa, driven by strong immigration and declining average household size
Approvals and completions are running below this level, at around 150K per annum
So the market remains in an ‘underlying shortage’ position
In the absence of sharp rises in interest rates, we expect 160K starts in 2005-06, followed by 180K in 2006-07
21 economics@
-30
-20
-10
0
10
20
30
40
94 95 96 97 98 99 00 01 02 03 04 05 06 070
5
10
15
20
25
30
35
40
45
50'000 units'000 units
Underlyingrequirements(right scale)
Completions(right scale)
"Surplus"(left scale)
"Shortage"(left scale)
Queensland housing market balance
Queensland housing market fundamentals also point to continued growth in housing activityQueensland housing market fundamentals also Queensland housing market fundamentals also point to continued growth in housing activitypoint to continued growth in housing activity
Note: ‘Surplus’ or ‘shortage’ is the cumulative difference between completions and underlying demand from an historical starting point. The direction of movements in this measure is more significant than the level. Sources: ABS; Economics@ANZ.
Migration to Queensland
0
200
400
600
800
96 97 98 99 00 01 02 03 04 05
No per week (4-qtrmoving average)
From overseas
From interstate
Queensland population
0.0
0.5
1.0
1.5
2.0
2.5
3.0
96 97 98 99 00 01 02 03 04 05
% change fromyear earlier
Queensland
Rest of Australia
22 economics@
However the supply of housing has barely kept However the supply of housing has barely kept pace with the increase in underlying demandpace with the increase in underlying demand
Number of households and number of dwellings
Note: Dwelling stock estimates for 1991, 1996 and 2001 based on census figures; other years interpolated using completions data. Sources: RBA; ABS; Economics@ANZ.
Over the twelve years to 2003-04, the number of households rose by 1.42 million or 23%
– faster than the increase in population (15%) because of falling average household size
Over the same period, the stock of housing increased by 1.60 million or 25%
– 1.78 mn new dwellings were completed during this period, but around 180,000 old dwellings were demolished
In effect, around 89% of the increase in the supply of housing was absorbed by increased demand
5.5
6.0
6.5
7.0
7.5
8.0
8.5
92 93 94 95 96 97 98 99 00 01 02 03 04
Number of dwellings
Number of households
Mn
23 economics@
The rise in house prices over the past five years is The rise in house prices over the past five years is thus ‘fundamentally’ justified, not a ‘bubble’thus ‘fundamentally’ justified, not a ‘bubble’
Note: data are for the June quarter each year.Sources: ABS; REIA; Economics@ANZ.
Borrowing capacity and house prices
50
100
150
200
250
300
350
400
89 90 91 92 93 94 95 96 97 98 99 00 01 02 03 04
$'000
Mortgage loan obtainableby couple earning average
weekly male & femaleearnings, with repayments
capped at 25% of gross income
Average capitalcity house price
Over the past 12 years average incomes have risen by two-thirds while the mortgage rate has fallen by about one-thirdThe borrowing capacity of an average-income household has more than doubled as a resultWith little net increase in the stock of dwellings this increase in ‘purchasing power’ has been capitalized into pricesHowever, this is one-time shift in the level of house prices – not a permanent increase in their rate of change
24 economics@
Australia’s tax system has played a key role in encouraging investment in rental propertyAustralia’s tax system has played a key role in Australia’s tax system has played a key role in encouraging investment in rental propertyencouraging investment in rental property
Note: Data are for fiscal years ended 30 June.Sources: Australian Taxation Office; Economics@ANZ .
Taxpayers with rental income
9
10
11
12
13
14
94 95 96 97 98 99 00 01 02 03
% of total no. of personaltaxpayers
Interest paid by property investors
3
4
5
6
7
8
94 95 96 97 98 99 00 01 02 03
$bn
Net rental income
-1.5
-1.0
-0.5
0.0
0.5
1.0
94 95 96 97 98 99 00 01 02 03
$bn
50525456586062
94 95 96 97 98 99 00 01 02 03
% of total
Loss-making property investors
25 economics@
House prices in major East Coast cities have peaked while smaller cities still catching upHouse prices in major East Coast cities have House prices in major East Coast cities have peaked while smaller cities still catching uppeaked while smaller cities still catching up
Sources: ABS; Economics@ANZ.
Capital city house prices
100
150
200
250
300
350
97 98 99 00 01 02 03 04 05
1989-90=100
Sydney
Melbourne
Brisbane
100
150
200
250
300
350
97 98 99 00 01 02 03 04 05
1989-90=100
Adelaide
Perth
Hobart
26 economics@
-20
-10
0
10
20
30
40
Sydney Melbourne Brisbane Adelaide Perth Hobart
June qtr 2005 June qtr 2004
% change
Brisbane house prices are now more ‘over-valued’ than in any other capital cityBrisbane house prices are now more ‘overBrisbane house prices are now more ‘over--valued’ valued’ than in any other capital citythan in any other capital city
Capital city house prices – deviation from ‘fair value’*
*‘Fair value’ based on interest rates and average disposable incomes. Source: ABS; Economics@ANZ.
27 economics@
SummarySummarySummaryWorld economy will continue to show reasonable growth at least until 2008
– despite higher oil prices and rising US interest rates– ‘excess savings’ in Asia and elsewhere are helping to keep long-
term rates down and finance otherwise ‘unsustainable’ current account imbalances
Nearly 15 years out from the last recession, Australia’s economy is beginning to encounter capacity constraints
– whenever the economy has previously been at this stage of the cycle, policy mistakes have led to recession within two years
– it’s dangerous to say, but ‘this time it should be different’Interest rates are ‘on hold’ for the remainder of this year, butwill probably rise again in 2006
– unusually, fixed rates are lower than variable rates, presentingan opportunity to ‘lock in’
There’s unlikely to be a significant downturn in housing activity– 160K housing starts nationally in 05-06, rising to 180K in 06-07– Queensland starts 41K in 05-06, rising to 48K in 06-07
Residential property prices have peaked in most capital cities– Brisbane prices look more ‘over-valued’ than anywhere else