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Reserve building its economic hopes on housing

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Reserve building its economic hopes on housing

The weaker outlook for mining has the RBA turning its attention to the struggling home building industry as the next source of national growth.

In the statement, the bank says there are signs of an improvement in housing due to lower interest rates, pointing to recent rises in building approvals, dwelling prices and auction clearance rates.

The RBA expects this trend to continue and fuel growth in dwelling construction next year.

"Lower interest rates, rising rental yields and an improvement in conditions in the established housing market are expected to support rising dwelling investment," it forecast.

It also notes that financial assistance to first home buyers in New South Wales and South Australia has been targeted to those purchasing new homes, and this may further boost demand.

If its forecast of increasing residential construction activity comes to pass, the RBA is hoping that the building industry may reverse a trend of steeply falling employment, and start hiring again.

The bank notes the substantial 7 per cent decline in construction employment over the past year in response to falling amounts of building work.

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That sounds kind of daft:) When are they going to learn that a debt ponzi on a single asset class does not make a sustainable economy?

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That sounds kind of daft:) When are they going to learn that a debt ponzi on a single asset class does not make a sustainable economy?

"not on my watch" is their catch cry

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At most they have one more round in the chamber.

One last round of interest rate cuts.

The Japanese have learnt from there, there is not a lot you can do. I am just thankfull that it is impossible to charge people for having savings and pay people to have loans. Running interest rates under inflation is the best they can do and this usually leads to capital flight, i.e. might be demand for credit in those conditions but you will not maintain supply.

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Even with one more round of rate cuts, I don't see property prices growing too fast. It's like the cat is well and truly out of the bag now - no-one wants to say it, but it is. The property dream is kind of over.

Or are you suggesting tom that one more round of cuts is going to be used to try and prevent further or serious declines?

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At most they have one more round in the chamber.

One last round of interest rate cuts.

The Japanese have learnt from there, there is not a lot you can do. I am just thankfull that it is impossible to charge people for having savings and pay people to have loans. Running interest rates under inflation is the best they can do and this usually leads to capital flight, i.e. might be demand for credit in those conditions but you will not maintain supply.

I think the point of difference is that Australia is combining low interest rates with high net migration.

The evidence, both official and anecdotal, is pointing at a new wave of record migration with very little media coverage.

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I found this an interesting read. Stephen Kirchner advocates QE and says the RBA can do the same here.

The interest rate cut that wasn't

Much of the time, the RBA is simply playing catch-up to changes in the inflation rate. Consideration of the real cash rate puts the excited commentary surrounding official interest rate announcements in better perspective.

The real interest rate also helps explain why the Australian dollar exchange rate has been resilient in the face of lower nominal rates. The exchange rate is a relative price and other countries have been easing monetary policy too. Australia’s real interest rates remain well above those in the US, leaving Australia an attractive destination for foreign capital inflows.

The official interest rate is also not the interest rate at which home-owners, consumers and business actually borrow. Those rates are market-determined and the financial crisis has changed the relationship between official, wholesale and retail rates.

The RBA pays close attention to the transmission of changes in the official rate to these market-determined interest rates. If this transmission is weaker than sought, the RBA can always do more to obtain the desired easing in credit conditions.

Concerns that the RBA might ‘run out of ammunition’ by reducing official interest rates to zero are misplaced. The Reserve Bank can also change its operating instrument from the price to the quantity of money if needed.

It is not hard to imagine scenarios for the world and domestic economy that might lead the Reserve Bank of Australia to also resort to unconventional monetary policy instruments.

Quantitative easing is not a panacea and the new market monetarists sometimes oversell its benefits. However, it is the right monetary policy prescription under conditions such as those in the US and does not deserve the bad press it has received in Australia and abroad.

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I found this an interesting read. Stephen Kirchner advocates QE and says the RBA can do the same here.

Thanks for posting.

I don't know about interesting. It has actually shaken me up a bit. I guess you cannot have an unshakeable belief in anything anymore?

Is that something the RBA can do under its charter? Sure they can asssist with liquidity and short term money supply issues, but can they directly deposit into banks long term? What is all the fuss about overseas reliance etc, if our RBA could start making the deposits? Does this mean, in reality deflation is off the table, at least as a long term condition?

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I think the point of difference is that Australia is combining low interest rates with high net migration.

The evidence, both official and anecdotal, is pointing at a new wave of record migration with very little media coverage.

I guess another difference, after reading the business spec article, is that they lost their appetite for credit too. Indeed they are nett savers apart from their gov.

In Australia if there is supply and interest rates are at teh tright point I think we will want to take out loans in nearly any circumstance...

I suppose migration is another way of countering deflation. If you have a shrinking pool of people in an economy, you would expect the price of durables to decrease.

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Or are you suggesting tom that one more round of cuts is going to be used to try and prevent further or serious declines?

I am conifident another round of cuts will be used to try and avoid serious declines.

Don't know if they would be very potent from here though.

I guess the risk is, it is possible we get higher inflation here and have very low interest rates in the face of that. That would not be good for those who have cash in the bank in AUD or just about any Australian except the throngs who have debt up to the eyeballs...

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I think there is just so much going on in the world at the moment, that the Reserve Bank of Australia will be a follower not a leader.

They will fall victim of other nations economic policy, and will be helpless for them to do anything different in their own domestic market, even if they have the will to do so.

People think this thing is over.

Far from it.

Greece, Portugal and Spain for instance are discovering that despite austerity, they can't get their revenue to keep pace with their expenditure.

The common people are heading back to a cash market system, where cash is terms of barter, outside the governments and banking financial system. In Greece they have set up an internet credit system, where credits are stored to barter against other goods. Hence no tax paid.

I think there will be more of this in other places as well, as people cotton on.

Human beings are one of the most adaptable creatures on the planet.

Governments will watch as their revenue streams dry up, and yet their welfare costs will continue, as they continue to put the squeeze on the little people. They have started a spiral they cannot exit.

Japan has tried to kickstart their economy for 20 years using the same techniques now being orchestrated in USA and UK.

QE, as zerohedge rightly comments is "Q-Eternity".

The policy makers can't fathom what's gone wrong with their system.

Capitalism was meant to make everyone who was willing to work hard, rich.

It hasn't. Only a select few now hold all the wealth, and they aren't willing to erode that, by plowing it back into the system that they manipulated to get it in the first place.

I think the RBA in Australia is only a small player in the scheme of things, and will be dragged along in the flotsam.

I've been watching from the sidelines, and I can't see that anything has been fixed.

The old machine is a bit battered and bruised, but essentially they are patching her up.

I remember a commentator (I can't remember his name), who was on a panel of hedge fund and economic forum, who stated that he believed Japan would be the black swan and that it would be the first domino to fall (Not Europe).

I notice that last week Japan registered a decline in GDP again. Maybe people should be keeping on eye on that.

Something has to give.

This world is totally and utterly out of whack.

The RBA have got nothin.

Well that's my two bobs worth, anyway.

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I think there is just so much going on in the world at the moment,

thanks for that solomon, other than things are looking rosy

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Thanks for posting.

I don't know about interesting. It has actually shaken me up a bit. I guess you cannot have an unshakeable belief in anything anymore?

Is that something the RBA can do under its charter? Sure they can asssist with liquidity and short term money supply issues, but can they directly deposit into banks long term? What is all the fuss about overseas reliance etc, if our RBA could start making the deposits? Does this mean, in reality deflation is off the table, at least as a long term condition?

Their charter is quite broad tom.

RBA Charter

The Reserve Bank Board’s obligations with respect to monetary policy are laid out in Sections 10(2) and 11(1) of the Act. Section 10(2) of the Act, which is often referred to as the Bank’s ‘charter’, says:

‘It is the duty of the Reserve Bank Board, within the limits of its powers, to ensure that the monetary and banking policy of the Bank is directed to the greatest advantage of the people of Australia and that the powers of the Bank ... are exercised in such a manner as, in the opinion of the Reserve Bank Board, will best contribute to:

the stability of the currency of Australia;

the maintenance of full employment in Australia; and

the economic prosperity and welfare of the people of Australia.’

Section 11(1) of the Act covers the need to consult with Government;

‘the Reserve Bank Board is to inform the Government, from time to time, of the Bank's monetary and banking policy.’

The ‘charter’ of the Payments System Board is defined in section 10B(3) of the Act as follows:

‘It is the duty of the Payments System Board to ensure, within the limits of its powers, that:

the Bank’s payments system policy is directed to the greatest advantage of the people of Australia; and

the powers of the Bank under the Payment Systems (Regulation) Act 1998 and the Payment Systems and Netting Act 1998 are exercised in a way that, in the Board's opinion, will best contribute to:

controlling risk in the financial system;

promoting the efficiency of payments system; and

promoting competition in the market for payment services, consistent with the overall stability of the financial system; and

the powers and functions of the Bank under Part 7.3 of the Corporations Act 2001 are exercised in a way that, in the Board's opinion, will best contribute to the overall stability of the financial system.’

Seems they can do anything thing they like to further "the economic prosperity and welfare of the people of Australia." Deflation is far worse from their point of view so I think you can safely expect they will do everything in their power to prevent it. As sol says they may not succeed but they will definitely be trying...

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Something has to give.

This world is totally and utterly out of whack.

The RBA have got nothin.

Well that's my two bobs worth, anyway.

Good points.

On this last point though I agree that something has to give. My concern now is though will being prudent during the good times with savings be punished to save the many who will need saving in the bad times?

If they look after Australians, I fear savers factor very low on the Australian important people's list.

I guess we just have to wait and see be cause as you say something has to give.

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Good points.

On this last point though I agree that something has to give. My concern now is though will being prudent during the good times with savings be punished to save the many who will need saving in the bad times?

If they look after Australians, I fear savers factor very low on the Australian important people's list.

I guess we just have to wait and see be cause as you say something has to give.

I'm absolutely convinced* that the government and RBA will happily throw the rest of the economy under the bus in an attempt to save the big banks and homeowners if it comes down to that.

It's what has happened elsewhere in the world and seems to be the first sector of the economy that the govt tries to boost at the sign of any trouble.

*based on many things e.g. black dragon's comments, the way the govt stepped in to guarantee deposits up to $1m at the big banks etc.

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Good points.

On this last point though I agree that something has to give. My concern now is though will being prudent during the good times with savings be punished to save the many who will need saving in the bad times?

If they look after Australians, I fear savers factor very low on the Australian important people's list.

I guess we just have to wait and see be cause as you say something has to give.

This is one of my concerns as well, tom.

Usually the loudest baby gets the most milk!

I think the borrowers will be the loudest lobby group, (if they aren't already), and governments will respond to their bleeting. It will all be based on helping out the little aussie battler.

Those who have been prudent, as you say, may find themselves categorised and ostracised, as being the "rich". Yet many of those people have chosen not to buy a home.

I don't know where the first flaw in the system will occur, but I have this imposing feeling that once the crack appears, all that liquidity that has been pumped into the system will flow out, and we will be back to a credit crunch.

I would love to know where the big cash flows are occurring in the system at the moment. That could give a clue.

But if the tide goes out, the RBA may find that they need to directly deposit into banks. I think there must be a lot of wealth denominated in $AUD at the moment to be keeping the exchange rate so high. Imagine if that all disappeared! Remember that the rest of the world is at or about ZIRP. Even getting 2% - 3% (which doesn't seem much) is a higher return than most.

I also believe that the RBA, whilst it can determine certain policy, is bound to seek Government approval for those terms of policy which extend beyond their constitutional boundaries. It will be interesting to see, therefore, exactly what the RBA believe sits within their jurisdiction. I believe, as others do on this forum, that they will do everything in their power to avoid deflation (the big bogey man to capitalists), and to support the big four banks. Too much vested interest tied up, to allow them to fail. (Disclaimer: I have savings in the bank)

My interest will be to see, whether any of their actions actually work, in the light of global events.

I think they will need to cut rates again in the short term. Thinking that this action will reinforce the small amount of activity in the "housing/home sector", that recent rate cuts have generated (if it has).

I don't think any government has fully acknowledged that their plebs are still zonked out on debt.

Fascinating time to live in.

Edited by Solomon

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I also believe that the RBA, whilst it can determine certain policy, is bound to seek Government approval for those terms of policy which extend beyond their constitutional boundaries. It will be interesting to see, therefore, exactly what the RBA believe sits within their jurisdiction. I believe, as others do on this forum, that they will do everything in their power to avoid deflation (the big bogey man to capitalists), and to support the big four banks. Too much vested interest tied up, to allow them to fail. (Disclaimer: I have savings in the bank)

You guys have got me thinking a few things now:

The will of the people;

In additional to the loudest lobby group the gov themselves seem to have some vested interest in property. Nothing really insidious about that, as they are of that demographic for the main.

Looking at that then, the RBA going to the government to seek approval for quantitative easing would to me be a similar scenario to a drug dealer asking an addict if he wants free gear?

I fear the answer would be a resounding "yes" no matter what the circumstances, Labor / Liberal even Greens, I think they would all give that a big thumbs up.

Limits on QE:

Wulfgar and others less frequently refer to international money printing rules? I can recall an immigration case where the international convention on the rights of a child were trumped by local laws anyway where they clash, so I don't think international rules truly bind us even if we do sign up to them.

So is there even a limit to this ability? Some kind of control mechanism, or could we end up with a Weimar situation in Australia? We would still be relatively wealthy as I see it but cash would be far from king...

The future:

It looks like a world with a real international currency is a long way off. Sovereign currencies appear to be the ticket out of deflation, and the potency of that is too important to governments to sign up to unified currencies. We also have the Euro for a good example of what can go wrong.

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I think the borrowers will be the loudest lobby group, (if they aren't already), and governments will respond to their bleeting. It will all be based on helping out the little aussie battler.

Those who have been prudent, as you say, may find themselves categorised and ostracised, as being the "rich". Yet many of those people have chosen not to buy a home.

I think they are already. Only 30% of the population are house borrowers, but look at the commotion when IRs rise.

I also believe that the RBA, whilst it can determine certain policy, is bound to seek Government approval for those terms of policy which extend beyond their constitutional boundaries. It will be interesting to see, therefore, exactly what the RBA believe sits within their jurisdiction. I believe, as others do on this forum, that they will do everything in their power to avoid deflation (the big bogey man to capitalists), and to support the big four banks. Too much vested interest tied up, to allow them to fail. (Disclaimer: I have savings in the bank)

I don't think the constitution mentions the RBA. It's three objectives are so vague that they could argue any actions meet the objectives.

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I think they are already. Only 30% of the population are house borrowers, but look at the commotion when IRs rise.

I think the ~30% that own their house outright also whinge when IR's rise because they are concerned about the value of their precious asset.

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I remember a commentator (I can't remember his name), who was on a panel of hedge fund and economic forum, who stated that he believed Japan would be the black swan and that it would be the first domino to fall (Not Europe).

I notice that last week Japan registered a decline in GDP again. Maybe people should be keeping on eye on that.

I found the video of Kyle Bass where he speaks about Japan. You need to pick it up at 37:00 in the link.

http://www.youtube.com/watch?v=HF3sJFCyyMM

Edited by Solomon

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I don't think the constitution mentions the RBA. It's three objectives are so vague that they could argue any actions meet the objectives.

Hi zaph,

I didn't actually mean the Australian Constitution, but the constitutional setup of the RBA.

I agree with you that the charter of their establishment is fairly broad, but there must come a moment where they may infringe upon parliamentary jurisdiction in their policy making.

I'm not sure what that is, or when, or how that might be reached. That is the point.

Can the RBA shore up the home/housing sector, if the government of the day, does not want to?

If the politicians electorates were to reject such a proposal, etc.

Can the RBA make policies beneficial to the banks survival, if the mood/policy of the government in power at the time, is to allow banks to fail?

That is my question. Where does their independent status infringe upon the constitutional power of the governing body?

Governments in the past 2 decades have been quick to distance themselves and to reinforce the independence of the RBA in determining fiscal policy, (setting interest rates), but I wonder does that relationship sour, if the RBA actually do something, which paints the politicians into a corner.

My second part of that question, has to do with what actual revenue streams the RBA have, and what controls are written into legislation regarding them.

Are they simply a policy making body, or do they have actual amounts of funds to operate with?

Can they enlarge those revenue streams, thereby reinforcing their independence even further, without the approval of federal government?

I'm just tossing thoughts into the air.

They could become crucial questions as we get further into this.

People are asking this about the Federal Reserve Bank in USA. (Totally different scenario I know, but people are now questioning their authority to do what they have done, and whether they shouldn't come under stricter controls.)

Edited by Solomon

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I received the following info in an email today. It looks like the gubment are propping up house prices by stuffing the population.

on Professor Birrell’s paper - The real number of new arrivals for 2011-2012 is 697,315 according to the Immigration Department’s annual report :

Working Holiday visas 222,992

Student Visas 254,166

457 Visas 125,070

Other (mainly skilled) 77,087

These figures do not include New Zealanders who do not need a visa to work here so the total could be close to 1 million all needing accommodation.

If we add the 210, 000 who come here as migrants then the total is well over 1 million for 2011-2012.

These figures do not take into account the number of overseas investors who purchase houses or apartments – It all adds up to pressure on our housing market.

and puts real pressure on current Australians and school leavers looking for work.

Talk about a BIG AUSTRALIA.

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I received the following info in an email today. It looks like the gubment are propping up house prices by stuffing the population.

I wonder how many people who move here think the posted rents are monthly...

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