First, the RBA’s Dr Luci Ellis will be giving an important speech on housing at the AFR’s conference next week. It is almost certain to be the most interesting and thoughtful presentation on housing by a public official in 2010 (apologies to Luci for inflating expectations!).
As I have noted here before, Luci is one of the RBA’s two internal housing experts, alongside Tony Richards. Her primary day job is, however, much broader--managing the RBA’s “system stability” department, which means she has responsibility for ensuring that things don’t go cactus, or at least anticipating when the cacti are likely to start emerging. She also produces the bi-annual Financial Stability Review, which I personally think is probably the best document that the RBA publishes.
Anyhow, I actually know Luci, and think she is one of the smartest operators inside the Bank. Without plugging her too hard, she has to be the best medium-term shot we have of getting Australia’s first female Governor (something the SMH’s Jessica Irvine called out for recently). She must also be an almost-sure-bet to become an Assistant Governor, which might be precedential in and of itself. Does anyone know if Australia has had a female Assistant Governor before?
As it happens, I will also be speaking at the conference, which is being held at the Sheraton on the Park in Sydney. In my own presentation I will recycle through a few old facts. But I also expect to tender some analysis on the profoundly misunderstood risks of housing and home ownership in particular. Think of this as an attempt to put some flesh on the bones of the RBA Governor’s recent warnings about gearing up against bricks and mortar.
Given my paucity of written product, and the expectation that this will continue for some time yet, I will conclude this missive with a few excerpts from Dr Phil Lowe’s speech the other day.
One of the issues I have been reflecting a little on lately is where the cash rate is heading in 2010-11. There seems to be genuine bifurcation between the market currently pricing a 5% to 5.4% cash rate next year, and some economists' expectations that rates are heading to 6% or higher. This would put real-world lending rates in seriously restrictive territory (think 2007-08). I suspect that not even the RBA has a clear view on where rates will be in 12 months time. But in an election year this intrinsically hawkish institution is sure-as-hell focused on those 'upside risks', as you can see from Phil's speech (emphasis added):
“While the global economy is recovering, the recovery has been quite uneven to date. In Asia, it has been V-shaped, but in the countries of the North Atlantic, particularly those in Europe, it has been subdued (Graph 2). Output remains below the level it reached in 2008 and, in many countries, it will still be some time before that earlier peak is reached again...
China continues to be at the forefront of the recovery. Growth over the first few months of 2010 was strong, and recent indicators suggest that this momentum has continued. Investment in the manufacturing sector and in infrastructure has, if anything, surprised on the upside (Graph 3). The main issue continues to be the potential for the Chinese economy to run too hot, putting upward pressures on the prices of goods and services and on housing prices. Recently, the Chinese authorities have been responding to this risk, especially through steps to rein in the property market...
In the economies of the North Atlantic the challenges are very different. In many countries, financial systems have not returned to full health, consumer confidence is still low, housing markets are yet to show sustainable signs of recovery and governments face very significant medium-term fiscal challenges. Conditions in Europe, in particular, remain weak, with domestic final demand still not growing (Graph 5). In contrast, in the United States, domestic demand is now growing again, and recent economic data have generally been a bit better than earlier expected. Both consumption and spending on plant and equipment by businesses have increased, surveys suggest that business conditions have improved, and employment is growing again. However, as in Europe, the recovery in the United States remains dependent on stimulatory settings of both fiscal and monetary policy, and fiscal issues cloud the medium-term outlook...
The central forecast is for the Australian economy to expand by around 3¼ per cent over 2010, before growth picks up to be in the 3¾–4 per cent range over the next couple of years (Graph 6). The forecast for 2010 is unchanged from that of three months ago, while the forecasts for the following years have been revised up a little to above-average growth, partly reflecting above-average growth in both the labour force and the capital stock...
This boost in the terms of trade this year will add significantly to national income. In putting together the Reserve Bank’s forecasts it has been assumed that more of this boost to income is saved than was the case in the earlier boom in the terms of trade. This reflects two factors. The first is the different position of the Federal budget and the second is the more cautious approach to spending currently being displayed by the household sector. If this lift in saving does not occur, then demand in the economy could well be stronger than forecast, and this would put additional pressure on capacity…
[The] central scenario for Australia remains a positive one. Our major trading partners are growing solidly, commodity prices are high and domestic income is likely to grow strongly over the year ahead. If this central scenario were to eventuate, a major challenge will be to expand the supply side of the economy so that demand can grow solidly without adding to inflation. At the same time, we need to be aware that circumstances can change quickly. If they do, Australia is in the fortunate position, as are a number of countries in Asia, of having the policy flexibility to be able to respond...
[The inflation] outcome for the March quarter was slightly higher than we, and most market observers, had been expecting. One clearly needs to be cautious in interpreting a single figure. However, this outcome is consistent with the idea that the disinflationary forces in the economy are not quite as strong as previously expected, largely because the economy has performed better than previously expected."
