Are interest rates too high?

A whole raft of data has been released this week by the Australian Bureau of Statistics (ABS) and most of it has not been particularly positive.  These figures pose the question, are interest rates too high?

Unemployment data released this week showed that whilst unemployment remains at low levels it increased from 5.1% in June to 5.3% in July.  The increase in the unemployment rate was due to a fall in the number of employed persons over the month.

National unemployment rate

Unemployment rate

Source: rpdata.com, ABS

Building approvals data which was released last week showed that the total number of approvals fell by -3.3% during June which was the third successive month in which approvals fell.  Looking at the annual results, building approvals have increased by 13.2% however, at a time when we have an estimated undersupply of housing in excess of 175,000, building approvals peaked in 2003 and until recently were looking as if they were returning to those levels.  The three successive months of declining approvals looks set to ensure that the recovery in new home building is short-lived.

National dwelling approvals

Dwelling approvals

Source: rpdata.com, ABS

Housing finance data released this week by the ABS showed that owner occupier finance commitments fell by -3.9% during June.  Looking more closely at the data, finance for: the construction of new dwellings (-5.0%), purchase of new dwellings (-4.5%) and purchase of established dwellings (-3.7%) all fell during the month.  Owner occupier commitments have been trending lower since July 2009.  Perhaps more worrying is the weakening results for the value of investor finance commitments during the month.  The value of investor finance commitments fell from $7.6 billion in May to $7.3 billion in June.  Should this trend continue we could be faced with a situation where both investors and owner occupiers are remaining on the sidelines.

Total owner occupier finance approvals

Finance approvals

Source: rpdata.com, ABS

The weaker figures have not just been coming from the ABS, the latest RP Data-Rismark Home Value Index release showed that home values were relatively flat over the June quarter (-0.2%) and fell by -0.8% during June.  Other indicators such as our auction clearance rates have been trending lower since the middle of April and the RP Data Market Activity Index which measures pre-listing activity by real estate agents has also fallen in recent months.

Rolling quarterly change in national capital city home values

Rolling quarterly change

Source: rpdata.com-Rismark

Overall the data seems to suggest that as stimulus is being removed from the economy activity is slowing.  Unfortunately for consumers (and the Reserve Bank) interest rates are a fairly blunt tool and whilst it probably isn’t in the country’s best interests to see house prices continuing to ramp up at the rate in which they were, it would be beneficial to have interest rates at a level which would encourage the development of additional new homes.  Unfortunately the current interest rate level appears to have slowed property price growth but has also stifled new home construction.

Overall, we don’t believe that interest rates are too high but if the economy begins to slow and some of these indicators continue to weaken the RBA may have to reconsider interest rates and could potentially reduce interest rates.

About Tim Lawless

Tim heads up the RP Data research and analytics team, analysing real estate markets, demographics and economic trends across Australia

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2 Responses to Are interest rates too high?

  1. Danny August 13, 2010 at 1:33 pm #

    Out of curiosity, has there been any quantitative studies in to the effects looming elections have on consumer sentiment, and in particular finance commitments. We all ‘know’ that uncertainty of our country’s direction holds us back, though do we have any [at least rough] figures showing how much of this ‘slowdown’ is contributed to election uncertainty, interest rate levels, tightened finance restrictions etc. I’m sure the RBA have at least SOME idea, well we hope at least, and is this information published?

  2. Greg Watson August 13, 2010 at 4:22 pm #

    Brokers and Agents are reporting to us it the banks causing these issues. They have tightened their lending generally and in particular to new entrants in the housing market thus reducing available buyers and subsequently reducing volumes. They have become so risk adverse now they are simply reducing the liquidity in the economy. Due to our recourse loans and therefore very low mortgage defaults the banks need to readjust their current risk profiles now. I wonder how they will maintain their future profits – by increasing fees. I thought a fundamental reason for a banks exisitence was to not only maintain liquidity in their community but drive it to create wealth. It is not just to protect the bank employees jobs and the share price. It looks like they are creating a self fulfilling prophecy in their adversity to risk. Greg Watson RealWay Australia

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