Rates to Remain Steady
With with the headline unemployment rate continuing to march steadily higher up to a seasonally adjusted 6.2 percent, real incomes looking set to decline with the wage price index sagging to a survey low, and inflation under control, in the normal scheme of things one would be forgiven for thinking that further easing in this cycle would be more or less a shoe-in.
And that's not to mention the "stubbornly high" currency, Australia's plummeting terms of trade and other negative factors.
Yet futures markets do not appear to believe that further rate cuts are in the pipeline for this easing cycle, and nor for that matter do most market economists.
30 Day interbank cash rate futures contracts for December are trading at 97.51, thus implying only a remote one-in-25 chance of a cut before Christmas at the December 2 Board Meeting, and interest rates appear widely expected to remain steady throughout 2015 too.
There are a number of possible explanations, including the Reserve Bank's own rhetoric which has suggested that the Board is unwilling to capitulate and cut again, improved business conditions (according to surveys at least), and perhaps more compellingly, that there is ample cheap credit sloshing around the economy already.
Lending Finance Trending Up
The ABS released its September Lending Finance data today, which revealed a better month for commercial lending after a sharp decline in August, and solid a year-on-year uplift of 21 percent in total lending finance, ensuring that on a rolling annual basis total lending continues to rise nicely.
While this is superficially good news, the perennial challenge has been that the allocation of so-termed "commercial lending" has been skewed too much towards investment real estate and not enough towards 'productive' business and enterprise lending throughout this cycle.
While internal categorisation of bank lending such as lines of credit can mask a different usage (i.e. a loan for a business venture secured against a home might be classified as an real estate loan), the figures reported by the ABS specifically split out loans for the construction and purchase of dwellings, alterations and additions (major renovation activity) and dwellings for rent and resale.
Macroprudential Measures Coming?
Assuming, therefore, that the ABS data is captured correctly, herein lies something of a conundrum for the Reserve Bank and for APRA.
The central bank has previously stated that it wanted to see an increase in dwelling construction, and rising dwelling prices and investor activity were surely prerequisites for that.
It has become increasingly clear, however, that investors are overwhelmingly pouring their capital into investment properties in one city in particular: Sydney.
And today's data merely reconfirmed what we already knew, with the biggest month of investor lending recorded in New South Wales (that's $5,104,495,000 if you enjoy trying to decipher big numbers with lots of commas) - which is the greatest figure ever recorded for any state across the three decades of the data series.
On a rolling annual basis the below chart indicates the parabolic nature of lending for property investment in Sydney, with the gross value of NSW investor lending increasing by 45 percent over the past year and an incredible 87.5 percent over the two years from September 2012 to September 2014.
Note that the current month's all-comers record reading implies that the rolling annual figures might be heading another 15 percent higher still unless regulators see fit to yank on a handbrake.
We note in passing here that, as forecast on this blog previously, activity in Queensland is also beginning to hot up, with monthly investor loan activity breaching levels not seen since Q4 2007.
The Brisbane property market looks likely to be a strong performer in 2015, with owner-occupier finance commitments also rising strongly since 2011.
On the other hand investor fixed loan activity in South Australia declined for a fourth consecutive month to be a platry 1 percent higher over the past year.
The Flailing Jawbone
While the Reserve Bank has to date only really taken the action of "jawboning" the Sydney market through noting that dwelling prices "can move up as well as down", property investors are clearly neither interested nor listening.
Gross yields in Sydney property are being eroded, but for the reasons we noted here, this alone will not deter investors with borrowing rates at generational lows and the option to fix mortgages for five years at very attractive rates.
The "unsmoothed" data below presents a handy indicator of the sheer scale of the Sydney property investor boom now playing out.
Sure, the value of property investor loans should naturally increase over time due to strong state population growth and inflation, yet gross lending is now a rip-roaring 5.6 times higher than it was at the turn of the century.
Not only has the Sydney investor boom not finished, it is actually still recording new heights by the month, which will translate into another strong year for dwelling prices ahead in 2015, particularly in the inner ring suburbs where investors increasingly own the lion's share of residential real estate.
With investors undeterred by words alone, therefore, APRA must surely be sharpening its pencils with regards to forthcoming market interventionary or macropudential measures.