Billionaire Developer Buying Land Shows RBA Cuts Work: EconomyMichael Heath
To gauge whether Australian central bank Governor Glenn Stevens’s two-year monetary easing cycle has done enough to revive growth, ask Australia’s sixth richest man.
Developer Harry Triguboff has bought new sites, is building a 600-unit apartment block on Queensland’s Gold Coast and plans to boost hiring as record-low borrowing costs stir demand.
“Interest rates are very important,” the 80-year-old billionaire founder of Meriton Pty, Australia’s biggest apartment developer, said in a telephone interview from Brisbane. “Because they dropped, so the market has improved.”
Rising home prices and employment gains in the construction industry are heralding a revival in business confidence even as investment in mining wanes. The prospect of an economic recovery is prompting money markets to price in the end of the central bank’s easing cycle, which started in late 2011 and brought borrowing costs to an unprecedented low of 2.5 percent.
“The $64,000 question is can the pick up in home prices translate into construction, which is what creates jobs, and at this stage the evidence points to a modest upswing,” said Warren Hogan, chief economist at Australia & New Zealand Banking Group Ltd. “Rate cuts from here bring in some risk of overcooking the property market. I think the RBA is comfortably sitting where it is.”
Traders are now pricing in an 8 basis-point increase for the cash rate over the coming year, according to a Credit Suisse Group AG index based on swaps. That contrasts with market estimates for a further 41 basis points of cuts on Aug. 6, when the RBA most recently lowered the benchmark.
After its rate reductions in late 2011 and early 2012 did little to spur lending and construction, the RBA is now noting a pickup in activity. “Dwelling construction remained higher than a year earlier and forward-looking indicators pointed to a further recovery in the second half of 2013,” the RBA said in minutes of its October meeting released Oct. 15.
Bill Evans, chief economist at Westpac Banking Corp. who was among the first to correctly predict the start of the rate-cut cycle in 2011, this month pushed out his forecast for more reductions to 2014 as the central bank gauges whether the pickup in housing activity is sustained.
The typical residential construction upturn adds about 2 percentage points to gross domestic product growth over a two to three-year cycle, according to Michael Blythe, chief economist in Sydney at Commonwealth Bank of Australia, the nation’s largest lender. Every A$1 spent building homes generates A$1.31 of spending elsewhere in the economy, while each A$1 million outlaid generates 17 jobs, he wrote in an Oct. 15 research note.
“It won’t take much for the RBA to say ‘enough’s enough, we want to take the wind out of the sails of the house-price pickup,” said Stephen Koukoulas, managing director of Canberra-based Market Economics Pty. He is the only economist among 31 surveyed by Bloomberg News who expects the central bank to begin raising rates in the first quarter of next year.
Home prices surged to a record in September, driven by dwelling values at all-time highs in the eastern cities of Sydney, Melbourne and Brisbane. The RP Data-Rismark capital city index jumped 5.5 percent from a year earlier across Australia’s major cities, 0.7 percent above the previous record in October 2010. Sydney and Melbourne led gains in the three months to Sept. 30, climbing 5.2 percent and 5 percent.
Mike Kane, chief executive officer of building materials company Boral Ltd., has noted signs of improvement in New South Wales, Western Australia, and Queensland states.
“We’ve seen actually the bottom in terms of our building products and our construction materials,” he said in an interview with Australian Broadcasting Corp.’s Inside Business program broadcast on Oct. 20.
Elsewhere, home prices in China’s four major cities rose the most since January 2011 last month. New home prices climbed in 69 of the 70 cities the government tracked in September from a year earlier, the National Bureau of Statistics said today.
In the U.S., employers probably added more workers last month than in August and the jobless rate held at the lowest level since 2008, a Bloomberg survey showed, indicating the economy was gaining momentum before the fiscal gridlock in Washington forced some federal agencies to close for 16 days.
It may take a while for construction to offset Australia’s broader employment slowdown. The Treasury expects the jobless rate will climb to a 10-year high of more than 6 percent next year, from 5.6 percent in September, as a once-in-a-century mining investment boom wanes.
The mining industry shed 2,800 workers in the 12 months through August, according to government data, while manufacturing lost 42,400 jobs, continuing a 15-year decline as the strong local dollar hurts competitiveness.
Helping stem the rise in unemployment is construction, where 79,700 jobs were generated in the 12 months through August. That’s the most in almost seven years and compared with 64,100 lost in the year earlier period, the data shows.
Triguboff, whose company last year built 1,700 apartments in New South Wales and Queensland states, is worth $5.1 billion according to the Bloomberg Billionaires Index.
“Buying land doesn’t mean I can hire more people tomorrow,” Triguboff said. “But we will be hiring more people within the next two or three months.”
The billionaire’s optimism is reflected more broadly: Confidence among Australian households and businesses jumped after Tony Abbott’s Liberal-National coalition last month defeated Kevin Rudd’s minority Labor government, ending three years of a hung parliament.
That has helped spur gains for Australia’s dollar, which traded at 96.52 U.S. cents at 4:34 p.m. in Sydney. The Aussie has gained about 8.4 percent since Aug. 30, the most among 10 major developed currencies after New Zealand, spurred by the recovery in confidence and the Federal Reserve’s decision not to taper its bond purchase plan.
The Aussie’s rebound leaves RBA Governor Stevens weighing the contractionary force of a stronger currency versus rising home prices and signs of a construction recovery.
“I personally would continue to think that a lower currency than this would be helpful in rebalancing the growth sources of the economy,” Stevens said in response to questions after a speech in Sydney on Oct. 18. “I’d prefer it to be lower than this rather than higher.”
That preference may ensure Stevens won’t rush to damp the housing recovery with higher borrowing costs even as he avoids spurring home prices with further rate reductions.
“While there is scope for a final cut, we continue to think that we are near the end of this easing cycle,” said Su-Lin Ong, Sydney-based head of Australian economic and fixed-income strategy at Royal Bank of Canada. “The base rate is likely to remain at a historical low throughout 2014.”