Australia’s housing finance figures might well be ringing alarm bells.

The Bureau of Statistics reports that home finance commitments fell steeply in January, both in terms of the number of home building starts financed and the amount lent to help people buy homes.

These figures, of course, are still affected by Federal government moves to wind back its stimulus spending.

So it may take some months yet for clear trends to appear.

Even so, the bureau reports that a bare $21.2 billion was lent in January to finance home purchases, a 3.3 per cent fall from the December level.

Indeed, the bureau’s figures now show that lending to build new homes has now fallen for three successive months.

The Housing Industry Association says recent rate rises are curbing activity in Australia’s housing market.

The Reserve Bank has  raised rates in four of the past five months.

The Association senior economist, Ben Phillip, said the situation now calls for care.

“The Reserve Bank must take stock of the impact that higher interest rates are having on the new home market,” Mr Phillips said.

The bank, itself, is aware of the problem, noting that spending on housing will have to be increased, over the medium term, if the demands of Australia’s strongly rising population are to be met, without fresh pressure on both house prices and rents.

The bank’s Assistant Governor, Phlip Lowe, acknowledged these risks, in a speech he gave to a seminar in Sydney.

(see next story)

Kids staying at home longer?

House bursting at the seams?

Don’t worry.  You are not alone.

The Reserve Bank knows of your problems.

Indeed, it fears that these trends could push house prices – and rents – even higher

Its Assistant Governor, Philip Lowe, spoke at some length about these issues, at a seminar in Sydney today.

He noted that the number of houses being built in Australia over recent years had been below average, even though the nation’s population has been growing strongly.

That had meant house prices had been rising and rental vacancy rates had been very low.

Mr Lowe spoke of other, less obvious, trends, too.

He said that, on average,  more Australians are now living in each house and more money is being spent on renovations, rather than new buildings, now.

“Obviously examples of this are the trend towards young adults staying in the parental home longer and a rise in the number of people sharing accommodation,” Mr Lowe said.

“In a sense, as a society, there has been a trade off between quality and quantity.

“In particular, we have chosen to build bigger and better appointed dwellings, rather than more dwellings,” Mr Lowe said.

Mr Lowe said if strong population growth continues over an extended time, Australia might have to devote a bigger share of its gross domestic product to housing in future.

“If this does not happen further adjustment in housing prices and rents is likely to occur,” Mr Lowe warned.

We’ll all  be out shopping again soon – this time with our own money.

The economists at  Access Economics, who have just published new retail forecasts, are confident about that.

Naturally they admit that our spending has been boosted over the past year by stimulus measures, such as tax breaks,  subsidies and low interest rates, which left extra money in many budgets.

However they say those times are now rapidly  passing , to be replaced by new growth, based on a stronger job market.

“Ultimately,” they say,”spending growth is regulated by income growth.”

Th Access economists say, too, that job growth is the “bedrock” of consumer spending.

Access noted that almost 200,000 jobs had been created in the five months to January.

It said, too, that about half of those new jobs had been full time.

“A greater sense of security makes for a more confident consumer,” Access said.

Its work is backed by other economic research.

The National Australia Bank, for example, is reporting that business confidence has returned to the surprisingly strong levels of last November.

That means business confidence is now back at levels not previously seen since May 2002.

And the ANZ bank said the number of job ads, appearing in Australia, had leapt by 19.2 per cent in February.

The ANZ said the nation is now “enjoying solid employment growth and reduced unemployment.”

However it warned that “a record 30.2 per cent” of all Australian jobs are now part time or casual.

The bank’s chief economist, Warren Hogan, said this represents “a significant degree of spare capacity or underemployment.”

Access has reservations, too.

It says, for example, that there are still “plenty of factors which will stop retail sales from being spectacular.”

These would include further interest rate rises, which would slow growth in house prices and ultimately affect consumer confidence.

These rate rises would eat directly into shoppers’ incomes, Access said.

Prepare for further rate rises.

That’s the message the Reserve Bank wants home buyers to take from its announcement of yesterday’s 25 basis point rise.

In that  announcement, the bank’s Governor, Glenn Stevens, said it is now appropriate for Australia’s interest rates to be closer to their historical averages.

“Today’s decision is a step in that process,” Mr Stevens added.

He said  Australia’s interest rates are still “lower than average.”

The latest rise, though, is the fourth in five months.

The Housing Industry Association said these rises, together, mean that first home buyers now have to find an extra $216 a month, on average, to get into their homes.

The latest rise took the Reserve Bank’s target rate to 4 per cent.

Australia’s banks and other lenders are expected to pass it on in full.

However the Treasurer, Wayne Swan said Australia’s banks would have “absolutely no justification” for any bigger rises.

He said bank margins had already returned to pre-crisis levels.

Mr Swan said families with a typical $300,000 home loan would have to “stump up” another $50 a month, as a result of yesterday’s rate rise.

Most analysts expect two more increases, of a similar size, in the not too distant future.

That would mean many home buyers would have to find another $100 a month.

Thousands of Australian families will be placed under severe financial pressure, as that happens.

Those whose main  breadwinners are still working part time, will be particularly vulnerable.

Thousands of Australians were shifted from full to part time work, when the global economic crisis struck.

However thousands of Australians, who would like to move back to full time jobs, are still working part time.

Mr Stevens said Australia’s underlying inflation rate had eased, as expected, from its peak in 2008.

But he said now that the risk of a serious economic contraction in Australia has  passed, less monetary stimulus is needed.

The Reserve Bank raised its target interest rate by 25 basis points to 4 per cent today, even though building approvals, throughout Australia, plunged by 7 per cent in January.

This followed three consecutive interest rate rises late last year.

The building industry had warned that approvals for unit and semi-detached housing in Victoria plunged by 29.1 per cent in January.

However the Reserve Bank Governor, Glenn Stevens, insisted that the latest rise is necessary.

“The global economy is growing,” Mr Stevens said.

“And world GDP is expected to rise at close to trend pace in 2010 and 2011.”

He admitted though that the expansion “is still hesitant in the major countries,”

Mr Stevens said that was  due to the continuing legacy of the financial crisis, which is producing “ongoing excess capacity.”

” In Asia, where financial sectors are not impaired, growth has continued to be quite strong,” Mr Stevens said.

“The authorities in some countries are now seeking to reduce the degree of stimulus to their economies,” he added.

But Mr Stevens also said:”Global financial markets are functioning much better than they were a year ago.

“And the extraordinary support from governments and central banks is gradually being wound back.

“Credit conditions remain difficult in some major countries as banks continue to face loan losses associated with the period of economic weakness.

“Concerns regarding some sovereigns remain elevated.

Mr Stevens said Australia’s domestic economic conditions had been  stronger than expected, last year,  after a mild downturn a year ago.

“Inflation has, as expected, declined in underlying terms from its peak in 2008,” he added.

This had been  helped by the fall in commodity prices at the end of 2008, a noticeable slowing in private-sector labour costs during 2009, the rise in the exchange rate and the earlier period of slower growth in demand.

“CPI inflation has risen somewhat recently as temporary factors that had been holding it to unusually low rates are now abating,” he said.

“Inflation is expected to be consistent with the target in 2010,” he added.

The Reserve Bank aims to keep Australia’s annual underlying inflation rate in a 2-3 per cent, over the course of a business cycle.

The lure of the January sales proved as strong as ever last month, with retail sales throughout Australia rising 1.2 per cent during the month,

This followed disappointing pre Christmas trade, with sales falling by 0.9 per cent in December.

The Australian Bureau of Statistics  reported that Australia’s department stores, clothing and shoe shops and grocery chains all increased their sales in January.

However the nation’s cafes, restaurants and take-away food stores saw their trade fall, during the holiday period.

The bureau also reported today that home building approvals fell by 7 per cent during January.

This followed removal of the Federal government’s stimulus subsidy, for first home buyers.

However the Housing Industry Association reported, earlier this week, that home sales, by Australia’s volume builders, rebounded by 9.5 per cent in January.

The association took this as a sign that upgraders and investors are re-entering the nation’s housing market.

The Reserve Bank board, which is meeting today to review Australia’s interest rates, will take all of  these figures into account.

It’s decision is to be announced at 2.30 this afternoon.

Although car and house sales have been strong, easing price pressures might save Australia from another interest rate rise today.

At this stage, though, that is still far from certain and we will all have to wait until 2.30 this afternoon before we will know for sure.

That’s when the Reserve Bank plans to release the results of a review of Australia’s interest rates, that its board will conduct early today.

Either way, figures that the Australian Bureau of Statistics has just published are sure to weigh heavily on the board’s deliberations.

These include the bureau’s balance of payments figures and business indicators for the December quarter.

Other figures, published by the Housing Industry Association, are also likely to be influential.

They showed a 9.5 per cent rebound in the sales of Australia’s large volume residential builders in January.

The association’s chief economist, Harley Dale, said a sustained improvement, of this kind, would suggest that a recovery, driven both  by people upgrading  – and investors – would be “achievable.’

The Federal government’s now discontinued subsidy for first home buyers has been driving the market for some time now.

The bureau’s balance of payments figures showed some mixed results.

They revealed, for example, that Australia’s current account deficit rose by $2.7 billion, or 19 per cent, in the quarter to almost $17.5 billion.

That is expected to detract 1.3 percentage points from Australia’s economic growth in the December quarter, on a  volume measure.

The bureau’s figures also showed that Australia’s net foreign was almost $648 billion at the end of December.

That represented a rise of 2 per cent over 2009.

Detailed figures, in the Statistician’s bulletin, also suggested that new vehicle imports had  been particularly strong during the quarter.

But one figure, in the Statistician’s bulletin, stood out.

A technical indicator, called the implicit price deflator, fell by 2.1 per cent in the December quarter.

This suggests that Australia’s imports, in the December quarter, will have a significant impact on other price pressures in the economy.

The strength of the $A, over most of the December quarter, helped there.

The Reserve Bank aims to keep Australia’s inflation in a 2-3 per cent range, over the course of the business cycle.

It looks at pressures, like these, very closely, when it reviews Australia’s interest rates, as it will do today.

Australia’s economic recovery is deepening.

And the Federal government’s economic stimulus is playing its part.

Fresh evidence, on both fronts, showed up in  new capital spending figures, that the Bureau of Statistics has just released.

These showed that spending on industrial equipment, plant and machinery leapt by 12.4 per cent in the December quarter to $15.1 billion, on seasonally adjusted figures.

That was  7.2 per cent higher than the amount spent in the December quarter of 2008.

The bureau took the rare step of noting that
a large number of companies, which responded to its survey, said they had taken advantage of a tax break, that the government offered, to purchase new cars.

That break was part of the Federal government’s stimulus package.

The bureau’s figures strongly suggest that Australian car makers increased investment in their plants, to cope with this extra demand.

The bureau also reported that full time average weekly earnings, in the private sector, rose by 1.5 per cent in November and by 5.4 per cent over the year.

The comparable figures, for the public sector, were 1.3 per cent growth for the month and a 5.7 per cent rise over the year.

The Treasurer, Wayne Swan, told parliament that investment in private sector housing had fallen by more than 20 per cent last year, in the wake of the global economic crisis.

“But that has been offset by an increase of 42 per cent in public construction activity,” he added.

Tough times are back for Australia’s homebuyers.

A new study shows that affordability plunged by 18.4 per cent in the final three months of last year.

That took it to a level 22.3 per cent lower than that seen 12 months earlier.

This means that affordability is now moving back to the levels last seen in 2008.

But interest rates were much higher then than they are now.

The Housing Industry Association, which conducted the study, blames rising house prices, three interest rate rises and rapid population growth and the winding down of the Federal government’s assistance to first home buyers.

It said home buyers in Sydney, Brisbane, Hobart and Canberra had been hit hardest.

The HIA’s senior economist, Ben Phillips, said the brief opportunity that first home buyers recently had, to get into the market, is now closing.

“Australia’s fast growing population is pushing dwelling requirements to record high levels,” Mr Phillips said.

The association expects that there will be 151,000 new home starts Australia this year.

However Mr Phillips said that would be well short of the 190,000 needed to meet expected population growth.

A little more shopping around might be worthwhile right now, if you are in the market for a new home loan.

You might do better than you originally expected with an unconventional lender, like the AMP, or a small State-based bank.

The AMP’s chief executive, Craig Dunn is sounding very upbeat about his organisation’s prospects, right now.

Indeed, he has just announced that his organisation is slashing 10 basis points from its basic variable home loan rate.

Not a lot, perhaps, but a worthwhile saving, nevertheless, especially in the early years of a new loan.

That, of course, is when repayments are usually at their most painful levels.

Mr Dunn has also written to the Federal Treasurer, Wayne Swan, saying:”We are also hopeful that we will be able to further reduce our interest rates in the coming  months.”

He said this could happen  “as we gear up our operations in the light of ongoing improvements in the securitisation market.”

That’s where organisations, like the AMP, get much of the money that they subsequently lend to homebuyers, like you.

The Federal government is helping, too.

It has just ordered the Australian Office of Financial Management to invest up to $16 billion in Australian residential mortgage backed securities.

Mr Swan says it has done this to bolster competition among the nation’s home lenders.

The government, of course, has its own motives, too.

This move will help to keep activity levels high, in Australia’s home building industry, as temporary measures, associated with its stimulus packages are gradually withdrawn, over the year ahead.

The Federal government expects the Reserve Bank’s decision to keep interest rates on hold will help to sustain Australia’s economic recovery.

The Federal Treasurer, Wayne Swan, explained why, at question time shortly after Parliament resumed, for its autumn sittings.

“Today’s decision means that a families with a $300,000 mortgage are still paying around $600 a month less than they were paying 18 months ago,” Mr Swan said.

The Reserve Bank’s target rate was still 7.25 per back then. It is just 3.75 per cent now.

These rates have a big influence on home loan interest rates.

And the extra cash, now in the monthly budgets of several million young to middle aged families, packs a wallop, at suburban supermarkets and in local businesses throughout the country.

There was, of course, never any question of the Reserve Bank now returning to anything like the target rate, that it had set, back then.

At most, a rate rise of 25 – or perhaps even 50 – basis points might have been expected.

Even that, though, would have led to another round of rises in home loan interest rates.

And that would have further eroded the spending power of many Australian families.

The first three rate rises, that the Reserve Bank announced late last year, have already had that effect.

And the Reserve Bank board learnt, just three hours before it announced its decision, that business confidence slumped late last year, after the last of those three rate rises was announced.

The board’s decision, though, should be seen as a reprieve, rather than a firm declaration that Australia’s interest rates won’t rise anytime soon.

They are still well below levels the bank regards as normal.

What happens now?

The Treasurer spelt out the government’s plans as he continued his answer.

“…we are committed to a long-term strategy here,” he said.

Mr Swan said the government would do  everything it could to expand the productive capacity of the economy.

It would also do everything in its power to lessen inflationary pressures.

“We on this side of the House are determined to do everything we can to see sustainable growth which lifts living standards up and we are determined to make the necessary investments for the future,” Mr Swan said.

The Reserve Bank surprised many today, by deciding to keep its target interest rate on hold at 3.75 per cent.

The Bank’s Governor Glenn Stevens, noted that the global economy is growing, and said world GDP is expected to rise at close to trend pace in 2010 and 2011.

But he added:”The expansion is still likely to be modest in the major countries, due to the continuing legacy of the financial crisis, resulting in ongoing excess capacity.”

Mr Stevens did say that in Asia, where financial sectors are not impaired, recovery has been much quicker so far.

But he noted that the Chinese authorities are now seeking to reduce the degree of stimulus to their economy.

“Global financial markets are functioning much better than they were a year ago,
Mr Stevens said.

” Credit conditions nonetheless remain difficult in the major countries as banks continue to face loan losses associated with the period of economic weakness.

“Concerns regarding some sovereigns have increased.”

He said  economic conditions in Australia had  been stronger than expected, after a mild downturn a year ago.

But he added:” The effects of the fiscal stimulus on consumer demand have now faded.

However Mr Stevens added”… household finances are being supported by strong labour market outcomes and a recovery in net worth.

“Public infrastructure spending is now boosting demand, as is an upturn in housing construction.

“Investment in the resources sector is strong.

“The rate of unemployment appears to have peaked at a much lower level than earlier expected.”

Mr Stevens said tha has, as expected, inflation had declined in underlying terms from its peak in 2008.

That had been  helped by several factors.

These had included the fall in commodity prices at the end of 2008, a noticeable slowing in private?sector labour costs during 2009, the recent rise in the exchange rate and a period of slower growth in demand.

“CPI inflation has risen somewhat recently as temporary factors that had been holding it down are now abating.

” Inflation is expected to be consistent with the target in 2010, Mr Stevens said.

Credit for housing has been expanding at a solid pace, and dwelling prices have risen significantly over the past year, the Reserve Bank chief said.

“Business credit, in contrast, has continued to fall, as companies have sought to reduce leverage, and lenders have imposed tighter lending standards and in some cases sought to scale back their balance sheets.,” he added.

The decline in credit has been concentrated among large firms, which generally have had good access to equity capital and, more recently, to debt markets; credit conditions remain difficult for many smaller businesses.

With the risk of serious economic contraction in Australia having passed, the Board had moved at recent meetings to lessen the degree of monetary stimulus that was put in place when the outlook appeared to be much weaker.

Lenders have generally raised rates a little more than the cash rate over recent months and most loan rates have risen by close to a percentage point.

“Since information about the early impact of those changes is still limited, the Board judged it appropriate to hold a steady setting of monetary policy for the time being,” Mr Stevens said.

Interest rates to most borrowers nonetheless remain lower than average, he added.

” If economic conditions evolve broadly as expected, the Board considers it likely that monetary policy will, over time, need to be adjusted further in order to ensure that inflation remains consistent with the target over the medium term,” Mr Stevens said.

Two factors make another rate rise today all but inevitable.

The first is that Australia’s underlying inflation rate – of 3.6 per cent – is already above the Reserve Bank’s target range.

The second is that the nation is now emerging from the slump that followed the global economic crisis.

As Chris Richardson, the director of Access Economics notes, this is not a comfortable place to be at the start of an upturn.

A  former Treasury official, himself, Richardson is well place to know how Australia’s “official family” thinks on these matters.

The Federal Treasury and the Reserve Bank are both members of that “family.”

And they have a habit of thinking alike, when assessing the current state of the economy.

However that kind of thinking is far from universal.

Employer organisations, for example, are warning that the Reserve Bank could stifle Australia’s still week recovery if it raises interest rates too quickly.

And home buyers aren’t eager to see Australia’s  interest rates rise too quickly from their recent record lows.

Accees warns, though, that despite three recent rate rises, the upward movement in rates still has further to go.

But it added a caution.

“That said, there is no great rush to raise rates,” Access said.

“In the next six months underlying inflation will head down, rather than up,”it added.

At 2.30pm today, we will all know if the Reserve Bank’s board agrees with that assessment.

Another round of interest rate rises  became a virtual certainty today, when the Australian Bureau of Statistics reported that the nation’s inflation rate is rising.

The Consumer Price Index rose by 0.5 per cent in the final three months of last year, to produce an annual headline inflation rate of 2.1 per cent.

That’s up from 1.3 per cent in the 12 months to the end of September.

The Reserve Bank aims to keep Australian’s inflation rate in a 2-3 per cent range, over the course of a business cycle.

However, it uses what it calls an underlying inflation rate, not the bureau’s raw CPI figures, to make its calculations.

And, on that measure, Australia’s inflation rate – at 3.6 per cent – is already above the bank’s target range.

The fact that if fell slightly – from a revised 3.7 per cent – at the end of the September quarter won’t help homebuyers avoid another rate rise.

As the private forecaster Access Economics noted earlier today, a point above the Reserve Bank’s tolerance line is not a good starting place, as an economic recovery gets under way.

“Interest rates will head up alongside the Australian and global recoveries, as they should,” Access director Chris Richardson said.

The Reserve Bank board will meet next Tuesday to review the bank’s marker rate, which now stands at 3.75 per cent.

Mr Richardson said that rate would probably hit 5 to 5.5 per cent by the first half of next year.

Other information, also released today, confirms that another rate rise, as early as next month, is now even more likely.

The Westpac Bank reported that its leading indicator, which points to the likely pace of economic activity over the coming three to nine months, surged in November.

Australians are still prepared to spend heavily on big ticket items, even though there have been signs that consumer confidence has weakened recently.

This is confirmed in fresh data on home building approvals and new car sales.

Naturally, a few stimulus packages  help, especially at a time of global economic crisis.

And the Federal government’s stimulus packages boosted both car and home sales, with extra help for first home buyers and a tax break for business people buying new vehicles.

As the Federal Treasurer, Wayne Swan, pointed out yesterday, both of those measures have now been removed.

The Statistician  reported yesterday that home building approvals, throughout Australia, rose by 5.9 per cent in November.

That was well above expectations.

And industry figures showed that new vehicle sales last month were 15 per cent higher than those of December 2008.

So Mr Swan was upbeat, when he met reporters in Brisbane.

“Economic stimulus has seen Australia protected from the worst impacts of the global recession,” he said.

“…in particular you can see that in the new car sales data that’s out today – 940,000 new car sales over the year, and in the month of December we had record new car sales,” Mr Swan added.

“..what that points to is the impact in particular of the Small and General Business Tax Break, which concluded at the end of last year,” he said.

” Our stimulus peaked in the middle of last year – and this year the stimulus is gradually withdrawn as the economy gradually recovers.” he said.