Aussie Rate Rise by Proxy Cools Housing While Capping Currencyby and
Mortgage rate increases from banks may curb property market
Prospect of further RBA cuts keeps downard pressure on Aussie
Australia’s interest-rate increase by proxy will help put the brakes on its housing market while also reining in the currency. That’s a win-win situation for the central bank.
All four of the country’s biggest lenders have responded to stricter capital requirements by boosting home-loan rates for both owner occupiers and investors, pushing up borrowing costs for more than 80 percent of mortgage holders. That’s likely to further temper a housing market that’s showing signs of slowing after record low central bank rates helped drive Sydney housing prices up 60 percent over the past three years.
While it’s not a policy directly controlled by the Reserve Bank of Australia, the monetary authority was working with banking overseers to lessen housing market risks. The effective tightening engineered by stronger regulation has a distinct advantage over a cash-rate increase: it doesn’t cause the currency to strengthen. In fact, by widening the scope for a reluctant RBA to lower its benchmark, the sequence of events helped weaken the Aussie.
“This is a positive from the RBA’s perspective because it addresses financial stability concerns and once those are addressed they can focus on their economic targets which are full employment and inflation,” Greg Gibbs, director of Amplifying Global FX Capital, said from Singapore. “The low currency is helping support the non-resource sectors of the economy and the RBA would like it to remain low during this period of transition.”
The RBA has in recent months stopped voicing concern over the strength of the Aussie, suggesting it’s now more comfortable with the level of the currency. It’s fallen by about 24 percent over the past two years to 72.44 U.S. cents as of 12:30 p.m. on Monday in Sydney. That weakening of the currency is helpful as the economy navigates away from reliance on mining investment and suffers from a slump in commodity export prices.
The central bank is also showing increased comfort with the state of the real-estate market. The RBA said in its semiannual financial stability review that the market may be starting to slow, while rapid home construction in some areas is creating some oversupply. Clearance rates for residential property auctions have slid below 70 percent from a peak of more than 84 percent.
The swaps market is signaling a 75 percent chance that the RBA will cut its benchmark below an already record low 2 percent by the end of March, with a 33 percent chance that it will come as soon as next week, according to data compiled by Bloomberg.
The following charts illustrate the dominant mortgage-market position held by the lenders that have raised rates, some of the signs that the housing market is slowing, and the recent path of the Australian dollar.
Chart 1. Commonwealth Bank of Australia, National Australia Bank Ltd. and Australia & New Zealand Banking Group Ltd. last week followed the lead set by Westpac Banking Corp. in raising standard variable rates in response to increased capital costs. Between them, they account for some 83 percent of mortgage lending provided by Aussie banks, according to data from the prudential regulator.
Chart 2. Clearance rates at residential property auctions, an indicator of the health of the market, have come off the boil in recent months amid heightened regulatory scrutiny by Australian overseers and heightened global volatility. Turmoil in China, as reflected by the plunge in its equity markets, may also be reducing interest from overseas buyers.
Chart 3. While the Australian dollar has fallen as the RBA has lowered its benchmark since late 2011, the central bank has shown a reluctance to budge below the 2 percent level it reached in May.
Chart 4. The weakening of the Australian dollar since Westpac became the first lender to announce a broad-based increase in mortgage costs on Oct. 14 is particularly pronounced against New Zealand’s kiwi, a currency that tends to respond to global risk trends in a similar fashion to the Aussie.