Behind the curve?
With rates on hold today some prominent commentators took to the interweb to deliver a brutal assessment of the Reserve Bank having damaged credibility by abandoning its mandated inflation target.
The RBA may not worry too much about that, and markets were notably less perturbed, but this does raise the question of how inflation gets back to target now that construction employment looks set to melt away.
Lowe has previously implied that the unemployment rate could be around 4½ per cent without causing problems for inflation (in which case why do we need to see higher unemployment before a cut?).
The line seems to be that if unemployment doesn't fall below 5 per cent then rate cuts will follow soon.
The line seems to be that if unemployment doesn't fall below 5 per cent then rate cuts will follow soon.
AiG's Performance of Construction Index fell by 3 points to a significantly contractionary 42.6 for April 2019, with house building (36.4) and apartment activity (33.4) stuck at cripplingly low levels.
An interesting and valid question is whether any (or many) of the redundant construction workers return to New Zealand or elsewhere, in which case some of the related unemployment problem might be exported.
Others might find work in infrastructure or mining projects.
The central scenario is now for inflation to return to the bottom of the target range by 2020, though we've heard similarly upbeat forecasts before over the past three years.
In any event, markets are still pricing further easing sooner rather than later.
Out of the funk?
Bearing in mind I often look at things through a housing market lens, in a bored social media moment the other day I outlined a thesis for how the easing cycle might've ended (with due apologies for the vulgar language).
First and foremost, whomever forms the next government should dial back the misguided 'race to surplus' rhetoric and instead outline a viable plan to get the economy moving.
Following a further halting of Vale operations in Brazil iron ore spot prices across all grades continue to go ballistic, so Federal Budget surpluses could be in the bag regardless.
Short-term funding costs have certainly plummeted of late, so there may well also be a race to the bottom for new fixed rate mortgages (if not existing mortgages), which can help too.
But from my standpoint the bigger headwind for the housing market hasn't so much been the price of credit but access to it.
Declined loans have blown out dramatically (they're not always recorded as such) and processing times have been dragged out, while the minimum floor assessment rate of 7¼ per cent is realistically too high given where mortgage rates are.
Serviceability policies incorporating a buffer of, say, 2½ percentage points should be ample headroom, especially given there's no prospect of rate hikes any time soon.
When combined with a very rapid switch across to P&I loans this may be creating new distortions and sucking some of the lifeblood out of the economy.
Granted there are different ways to measure stock turnover - the construction cycle plays a distorting role, and getting real-time readings is a challenge - but investment banks, major banks, and other analysts all appear to see housing turnover tracking at around record lows, which hampers spending.
This lack of mobility mirrors the impacts of lending restrictions in other countries such as Sweden, where other distortions were also felt (including, paradoxically, less resilience to shocks).
It's tricky to see how consumption picks up when people aren't building, buying, renovating, and furnishing homes.
The other issue is the sheer pedantry of lenders when it comes to processing applications. I don't know much about the machinations here, but it's painful.
