Interest Rates - Up and Up

Richard Katter
Economics, Strategy and Research

Whilst the RBA caught many economists, including yours truly, napping last month; this month they have been more accommodating of the number one rule in economics, nobody likes surprises. Expectedly rates have risen 0.25% to 4.00%.

This month has seen some quite good economic data printed for both the last quarter and the last month, providing the RBA justification to increase rates.

Australia’s terms of trade (the relative price of our exports compared to our imports) rose 2.9% in Q4 2009 as our import prices fell faster than our export prices. Our current account deficit widened as domestic demand increased. The volume of exports increased 1.7% while imports increased by 7.7%. A widening current account deficit indicates increased consumption and buoyancy in the market as businesses restock inventories which were allowed to become depleted over the last 18 months. All in all this data points towards a recovery, which is well underway.

One of the most significant pieces of positive news though has been the 9.5% increase in new homes sales recorded in Australia for January 2010. The HIA New Home Sales Report indicated an increase of 10.1% in the number of private sector detached houses sold in January and an increase of 4.1% in the number of multi-unit dwelling sales. In December multi-unit dwellings printed an increase in sales activity of 14.5%.

These figures are significant in that the first home purchaser has left the market, on the back of the wind down of the FHOG, illustrating that investors and up graders are re-entering the market. Whilst we would like to see a sustained trend of increasing activity prior to stating that the market is “booming”, these figures illustrate that market sentiment is returning as investors and up-graders tend to be quite discretionary, only partaking in market activity when they believe the time is right.

The TD Securities – Melbourne Institute’s gauge of consumer price inflation rose 0.1% in February well below the January figure of 0.8%. The February rate reveals an annual rate of 1.9% which is outside the RBA’s target range of 2% - 3%. It is expected that this low inflation trend will unlikely continue as the unemployment rate is falling and consumption appears to be increasing.

We believe that the above positive data justifies the rate hike. There is key data to be released later this week (GDP and Building Approvals) which will influence the RBA’s actions in coming months. We believe that the RBA has at least another rate hike in them prior to round two of the State of Origin.

Koala Moratorium Extended

The public consultation period for the State Government’s fundamentally floored Draft South East Queensland (SEQ) Koala Conservation State Planning Policy (SPP) and Draft SEQ Koala Conservation State Planning Regulatory Provisions (SPRP) concluded late on Sunday 28 February. THG worked closely with industry on a number of submissions which illustrated the deficiencies of this proposed legislation.

THG assessed the likely economic impact which this legislation, in its current form, will have on the economy. The impact on jobs and the broad economy will surely pose a major concern for the Government and force them to reassess this legislation. THG have assessed that this proposed legislation will result in the loss of 270,000 potential dwellings within the SE Q Regional Plan ‘s Urban Footprint. To put this impact into perspective this equates to 40% of the dwellings required under the Plan to 2031.

The UDIA are currently waiting on The Department of Environment and Resource Management to provide clarification on the exemptions from the legislation. In the interim the hard work undertaken by industry groups, lobbying the Government, have resulted in the Moratorium Policy reportedly remaining in place until further resolution is achieved. Government are yet to provide formal confirmation in this regard.

It is essential that the exemptions are clarified urgently as clients with lawful development approvals are currently having follow on development applications rejected at lodgement due to the legal interpretations that have been provided to Local Government based on the current moratorium policy, in particularly relating to protected Koala bush land.

Please note that our industry is still facing an uphill battle to prevent this legislation being introduced in its current dysfunctional form.