How will the Reserve Bank of Australia (RBA) balance the risk of a Sydney housing “bubble” against the otherwise sluggish Australian economy?

Yesterday (Monday 1st June, 2015) Treasury Secretary, John Fraser, declared that Sydney and parts of Melbourne were “unequivocally” a residential property bubble. He not only warned of a bubble but said there was unequivocal evidence that one existed. This is one of the strongest official warnings I’ve seen of a Sydney, and potentially partial Melbourne, property price bubble, however, it must be noted that this is not representative of the rest of Australia’s property market at the time of writing.

These comments follow comments by Greg Medcraft, the usually reserved chairman of the Australian Securities and Investments Commission (ASIC), a couple of weeks ago with warnings about a housing “bubble” in Sydney and to a lesser extent Melbourne.

The RBAs balancing act comes as all other economic signals indicate further rate cuts are more than just a possibility this year, however further cuts to the historic low interest rate may continue to fuel this Sydney residential housing “bubble” at a time when personal debt levels are also at very high levels again.

Interest rate changes are considered a “blunt” monetary policy instrument and therefore the RBA will have to consider the broader Australian economy, as they can’t laser target particular areas of the economy with interest rate changes.
 

So what will they do at today’s RBA rate meeting ??

I don’t believe the RBA will drop interest rates at todays June 2015 rates meeting however, given the following economic conditions I do believe we will see a further cut to the historic low rates before the end of 2015

  • the continuing sluggish Australian economy
  • sharp declines in resource-related capital expenditure
  • business investment in Australia contracting at its fastest rate in more than five years and no signs of improvement any time soon (The latest Australian Bureau of Statistics (ABS) Capital Expenditure Survey revealed total real capital expenditure fell by 4.4% and resource-related investment plunged nearly 14% compared with the same time last year. In addition, UBS chief economist Scott Haslem described the latest estimate of investment plans in Australia as “recessionary”, after being “bleak” last time)
  • continued increased unemployment levels which do not appear to have peaked as yet
  • subdued inflation figures and
  • an Australian dollar which although nowhere near prior highs (as I write this article the AUD is a little above 0.76 cents), is still likely to be higher than the RBAs preferred levels.

As always we don’t have a crystal ball however, I do strongly feel the RBA will leave rates on hold today and continue to monitor the effects of prior rate cuts and broader economic factors before the next move on the Australian interest rate.

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