Dovish RBA to drive Aussie wealth boom

When doves fly

For years the Reserve Bank of Australia has harboured an obsession with 'financial stability', keeping monetary policy relatively tight and in doing so missing the inflation target for half a decade.

In all fairness it might well have worked eventually, as the unemployment rate had been grinding lower before the coronavirus recession.

Many of us decried the unnecessary output gap for years, though of course the benefit of hindsight is always 20/20 vision. 

In any case, the recession appears to have triggered a change of heart, and in turn a change of fortunes for the economy lies ahead.

Australia's huge stimulus package and successful containment of COVID-19 has led to a powerful rebound in the outlook, but the Reserve Bank's policy statement today remained dovish.

In fact, it has been clearly stated that interest rates will be going no higher until we have inflation sustainably back in the target 2 to 3 per cent range, which means a strong push for full employment is underway.

Boom lies ahead

A couple of other snippets of economic news today.

The commodity price index is up by 28 per cent over the past year (more if you use spot prices for the bulk commodities, with iron ore now accounting for nearly a third of the index after the annual re-weighting).

ANZ also reported that its job ads series have surged to the highest level since 2008.

And crucially, this has come at a time when there is no longer the pumping immigration to hold down wage price growth. 

This may well lead to labour shortages in some sectors (to go with the timber and other materials shortages that are already in evidence). 

Yet the RBA remained dovish in its statement, reiterating its commitment to the 3-year policy.

Source: RBA

There's a substantial uplift to Aussie household wealth lying ahead. 

As I've said here previously, housing prices could logically be repriced by between a quarter and a third higher over the next few years, without remotely troubling repayment ratios.

Local stock indices aren't looking particularly expensive now either, given they've essentially gone nowhere since 2007 while the outlook for commodities appears to have brightened considerably.

And if the RBA can see this thing through then there's no apparent reason we can't see wage price growth bumping back up towards 3-4 per cent for the first time since the resources boom.  

It's not hard to envision household wealth increasing to A$15 trillion over the next few years, meaning household wealth of more than $500,000 per capita...making Australia's households the wealthiest in the world.

No systemic risk from JobKeeper end

Fiscal cliff?

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Mortgage cliff becomes a hillock

Mortgage cliff evaporates

Loans on deferral fell to just $14 billion or 0.5 per cent of total loans in February, according to APRA's latest figures.

Given that we're now in April - and looking at the $22 billon of loans expiring or exiting deferral in February alone - it seems fairly safe to assume that the systemic risk has comfortably passed, with the handful of remaining loans to be flick-passed onto revised terms or referred for hardship.

The housing loans component was $11.7 billion, which is barely a fortnight's worth of new housing lending in today's money. 

As for deferral hotspots? Well, not really.

Victoria's return to repayment terms has lagged all the way through since the state's extended lockdown, but even here outstanding deferrals plunged to well under 1 per cent of housing loans in February. 

Testament to a well-managed year, and a green tick for lenders and regulators. 

US adds a million jobs, unemployment down to 6pc

1 million more jobs recovered

The US economy added another 915,000 jobs in March, while the figures for January and February were also revised up by a combined 156,000.

This was a big print which blitzed expectations of a 660,000 gain.

Since April 2020 13.8 million of the 22.2 million lost jobs have been recovered, or about 62 per cent.

While the low hanging fruit might've been plucked, the recent strength suggests the lost jobs could be recovered in full over the coming year. 

Participation rates remain well down, and the unemployment rate edged down from 6.2 per cent to 6 per cent.

Overall, a strong result, with sizeable gains in hospitality and leisure, education, and construction.

5-year bond yields increased on the news. 

Lending eases, tilts to investors

Lending cools

The first signs of caution, with owner-occupier lending pulling back by 1.8 per cent to $21.7 billion in February.

Investment lending increased to $6.9 billion in the month, though that remains a long way below the double-digit-billions levels we saw back in 2015. 

Not all of the housing lending is for existing dwellings.

There was a jump of 82 per cent for volatile construction finance in February, for example, to $2.6 billion.

Home loan borrowers in in New South Wales, Queensland, and Western Australia exercised a bit more caution in February (though admittedly February is a short month). 

First homebuyer numbers are now peaking out, especially in New South wales, and will gradually return to earth from here.

There's been a bit of media noise about riskier lending, but the average loan size for the purchase of existing dwellings pulled back in February. 

Running a smoother 3-month average we can see that loan sizes increased by about 6 per cent over the past year, roughly in line with disposable incomes, and also in line with what one might expect to see given lower mortgage rates. 

A tick in the box for my thesis that borrowers will naturally become more cautions as 2021 rolls on, with homebuyers being replaced by more investors over time. 

290,000 job vacancies and no immigration

Record high vacancies

This could start to get interesting! 

A record high 290,000 job vacancies in Australia, and presently no immigration to fill the roles. 

New South Wales alone accounts for an electrifying 94,000 job vacancies, so the unemployment rate in NSW should have a '4' in front of it pretty soon.

Queensland is also firing, with a record high 53,500 job vacancies across the state (many in the public sector, of course). 

There have been some sizeable and noteworthy increases in roles vacant in industries such as mining and construction.

Depending upon skillset, this is potentially best time since the resources boom to be searching for work in Australia.

There are already some signs of skill shortages, but mainly in the lower paid occupations to date, such as hospitality, accommodation, and food services. 

Maybe not one to take too literally, but I'll just leave one more chart here below: job vacancies accounting for more than 2 per cent of the entire labour force is a huge number, with some potentially interesting implications for where the unemployment rate could be headed. 

With international borders largely gummed up, Australia should indeed be looking for an unemployment rate in the 3 to 4 per cent range...and not before time.

Would be great to see!

House approvals are at record levels

Record house approvals

Building approvals jumped back up to a seasonally adjusted 19,400 in February, following a disrupted January where more Aussies than usual went away on domestic holidays (as also evidenced in the depleted labour force hours worked figures) and approvals were considerably lower. 

Let's take a bit of a top-down look at what's going on.

Firstly we can see that house approvals are at record levels at nearly 14,000 in February, seasonally adjusted, fuelled for now, of course, by the government's HomeBuilder stimulus.

The detailed figures show plenty of land release and building on city and town fringes, and it's certainly a good time to be selling dirt.

But, despite a solid rebound in February driven by Melbourne apartments, unit and attached dwelling approvals have plunged to just 5,000 per month, about only half of where they were for a long time previously. 

Super funds can't borrow to buy new units, Chinese investors don't like us at the moment, and other non-residents won't pay the surcharge taxes, so unit supply is going to be stymied over the coming years. 

Over the year to February around 191,000 dwellings were approved, well down on the 242,000 we saw during the building boom peaks of 2016, but still a decent chunk of building when the international borders are largely closed to immigration. 

The thing about detached housing supply is that it responds quickly.

Large unit developments are lumpy and can take 2-3 years to come online, but these days you can get most of a house built in 2-3 months. 

Of course, there is natural population growth, and expats are filtering home, so the oversupply risk in detached housing is modest, and will be confined to certain construction hotspots. 

Unit approvals in Sydney and Melbourne have continued to trend lower. 

But house approvals are firing, especially in Melbourne, and Perth which is absolutely booming on the back of hugely generous government grants. 

Major renovation approvals are also ballooning, as Aussies look for worthwhile places to put their stimulus cheques at a time when trips to Bali or Barbados aren't possible. 

Overall, a positive set of results for tradies, wages and materials price inflation, and for the economy in general, and nothing too much to worry about from a housing market perspective.

Immigration will restart eventually, but probably not until 2022.