Social proof: the good and the bad

Social proof is a cognitive shortcut we use when making decisions.

There are some risks involved in social proof.

But you can use it to your benefit too.

Here's how.

Oof

The RBA may talk about inflation coming back towards the target range.

Markets, however, just don't believe it.

Extraordinary breakeven inflation rate...

RBA inches closer to folding

Housing prices down 5pc in 2018

The ABS released its residential price indexes this morning for 2018.

With all the usual disclaimers about there being markets within markets within markets, detached house prices across the eight capital cities fell 6 per cent over the calendar year, and attached dwellings (including units, townhouses, and terraces) fell by 4 per cent.

Overall, median prices were 5 per cent lower. 

In Sydney, prices peaked in mid-2017 on this index (there's clearly a bit of a lag effect, as prices were seen to be on the way down a few months sooner than that) and detached house prices have fallen 9.8 per cent since that time. 

Attached dwelling prices across Sydney were also 7.7 per cent below their 2017 peak. 

The capital city indexes diverged during the mining boom, but have generally now converged again.

Tighter lending standards have impacted all markets - including those that were already struggling - making a bit of mincemeat out of the argument that the slowdown was driven by Sydney's apartment supply.

Australia's 'mean' dwelling price has fallen from $690,000 to $650,000 as the total value of dwelling stock fell to $6.7 trillion, down from $6.9 trillion a year earlier.

The figures for the total number of dwellings can and will be revised, but do show the faster pace of building in New South Wales since 2015, which is now getting set to slow again. 

The ABS now estimates Australia has 10¼ million dwellings. 

Finally, someone will always write somewhere that dwelling transfers are at record lows - but the figures are preliminary, and as ever will be revised up next quarter.

Finger on the button

The Reserve Bank's March 2019 Minutes suggested that the Board is teetering closer to the brink of rate cuts.

Closer reading of the Minutes is succinctly explained by Ricardo here.

Although logically it'd surely take more than one weak jobs figure to trigger a change of stance. 

US stocks have uncrashed

Interesting moves.

Not from from record highs now.

Somerset Storyfest

New book launch

I'm speaking at the Somerset Storyfest this week to launch my new book.

I'll be kicking off with a financial literacy breakfast, where I'll be speaking with Felicity Cooper of Cooper Wealth Management, winner of the FPA's prestigious Financial Planner of the Year award in 2018. 

And then I'll be speaking to children from dozens of schools through the week.

You can get a copy of my new book from Boffins Books, Book Depository, Booktopia, Dymocks...well, you know the rest!

Kia kaha

Brisbane housing market update

I take a look at some of the latest trends we've been seeing in this short piece here.

You can download a free buying guide here.

Case for rate cuts continues to build

More call for cuts

'Westpac’s forecast for RBA rate cuts in 2019 has gained significant support over the last week' noted Matthew Hassan, Senior Economist at Westpac. 

Indeed it has. 

Business and consumer confidence readings both weakened, confirming that the slowdown in the economy in the second half of 2018 is beginning to impact on decisions in 2019, including the willingness of businesses to hire and invest. 

Weakening household financial confidence is likely to be detrimental to decisions, and the survey detail for retail looks to be rather woeful. 

The Reserve Bank will also have to revise down its optimistic growth forecasts in the next SOMP. 

Jobs figures are key

The coming week's labour force figures therefore take on additional importance.

The pace of hiring has been very strong lately, with annual employment growth of 2.2 per cent over the year to January.

But if hiring begins to falter - with inflation already well below target and possibly decelerating - then there'll be no credible reason for interest rates not to be cut. 

The market's median forecast is for a reasonable enough +15,000 for total employment in February 2019, with the unemployment rate flat at a level 5 per cent.

And leading indicators seem to suggest that the slowdown in hiring may be gradual.

But two or three months of dodgy jobs results might be enough to tip the balance.

Markets are pricing an each-way bet of a cut by the middle of the calendar year, while Westpac itself expects rate to be cut twice by November .

Source: ASX 

Path of least regret

If the jobs figures do start to wane over the next few months then rates should absolutely be cut instead of allowing the economy to flounder below its capacity for longer, since the output gap has already seen elevated levels of underemployment for some time.

That's the path of least regret, because a rate cut can always be reversed if necessary...but if a downturn in the economy takes hold due to inaction then the fallout could be punishing. 

There's no question that the Reserve Bank's Governor Lowe has a financial stability...what the's word? Fixation? Fondness? Fetish? I'm not sure. At any rate, it's a healthy level of interest which would clearly make any such move a reluctant one. 

In other words the hurdle for further cuts to the cash rate is high. 

Lowe produced some innovative literature on asset prices and the credit-to-GDP gap with Claudio Borio of the Bank for International Settlements (BIS) all the way back in 2002, so it's by no means a new fad for him. 

But the RBA's very own releases have noted time and again that mortgage and household financial stress is low, debt is held in the hands of households that can afford it, and that there have been unprecedented balances in mortgage prepayments, offset accounts, and cash. 

And in any case the RBA has noted itself that it has no clear evidence of what the 'right' level of household debt should be (other economies have sustained far higher debt serviceability ratios without blinking, for example).

Lending much tighter

For the record, high-LVR lending for housing is tracking at the lowest level it's ever been, while low-doc lending is also now almost non-existent.

The stock of interest-only loans as a share of residential term loans by value is at its lowest level across the full data series. 

In the next fortnight or so we'll see that this proportion of ADI mortgage debt has likely dropped to about 25 per cent and falling fast.

This will help to reduce household debt ratios. 

Housing credit growth is as low as we've seen, and slowing, while investment loans are at by far the weakest ever level of growth. 

And although it wasn't reported anywhere, Australia's household debt to income ratio has actually been falling since June 2018 (it arguably never increased that much in the first place net of offset accounts, and certainly not net of deposits). 

Stay tuned...

I discussed on a London banking conference live panel some of the reasons why comparing debt ratios across countries may not be all that useful with a prominent figure from the BIS here.

Drehmann is a champion fellow, and has written several highly influential papers on the early-warning indicators of banking crises and other related topics. 

But global economists necessarily must take a headline level approach rather than granular analysis, and much can be missed in a headline ratio, not least the role of offset accounts in Australia. 

And the fact is a strong economy is by far the best buffer against financial stability risks, while quicker household income growth would also help to reduce debt ratios further. 

The Coalition's planned staged tax cuts could further assist household cashflows, although Labor and Bill Shorten have other ideas in this regard (which is to say, higher taxes). 

The labour force figures will be released alongside the latest demographic estimates on Thursday. 

If there's one data release you want to follow this year, it's the forthcoming jobs figures.