Australian Dollar: Housing Finance Commitments Data Gives RBA an Extra Card to Play

Lending to the Australian property sector is cooling as non-monetary policy measures start to work - a scenario that could prove negative for the Australian dollar.

October housing finance commitments fell for a second consecutive month in October with a reading of -2.7 being recorded.

Why is this relevant to the Australian dollar?

Rising property sector prices have been a thorn in the side of the RBA who have, arguably, had to constrain the extent and scope of interest rate cuts in fear of stoking a housing bubble.

Lower interest rates = easier borrowing conditions = higher house prices. At the same time, lower interest rates also aid the broader non-mining economy as investment capital becomes cheaper.

They also weigh on the Australian dollar making exports cheaper on the global market.

The pound to Australian dollar has risen from lows around 1.44 in 2013 to reach as high as 2.20 this year thanks in part to the RBA cutting rates.

So you can see why the RBA would want to cut, but cannot go too far.

Remove the threat of fuelling higher house prices and the job becomes a lot easier.

Note, all exchange rate quotes in this piece are taken from the inter-bank markets, your bank will then add a discretionary spread to the rate they offer you. However, an independent provider will guarantee to undercut your banks offer, thereby delivering up to 5% more FX for transfers.

Can the RBA Now Cut Again?

At present the RBA poses little threat to the Australian dollar with markets pricing in little chance of another cut in coming months, even though the currency is arguably trading higher than it should be.

The decline in housing finance commitments was again led by the investor segment, which continues to be hindered by the mid-year changes to lending requirements.

Owner-occupier lending was up only marginally in the month with the October out-of-cycle mortgage rate increases likely to have weighed on lending in the tail-end of the month.

“Overall, the data are consistent with our view that the housing market is cooling and residential construction’s contribution to economic growth will weaken in 2016,” says Daniel Gradwell at ANZ.

Gladwell believes the RBA must be thanked for the cooling sector, “it appears that the macro-prudential measures and higher interest rates are having a negative effect on housing finance.”

Total three-monthly annualised growth is now negative for the first time in over four years.

“This is likely to continue into 2016 given weaker housing market sentiment, as evidenced by slowing auction clearance rates and easing house price growth,” says Gradwell.

The stability of the housing sector remains a real concern to Australia with stock sitting at AUD $6 trillion.

House prices are at all-time highs with an average house costing AUD $1M in Sydney. The sector is about three times the value of national GDP and three times the value of the domestic stock market.

Will the RBA Cut Interest Rates Again?

The RBA is unlikely to act on interest rates again in the near future with Governor Stevens having recently noted recent cuts in interest rates were nowhere near as effective in stimulating the economy as they had been when rates were cut from very high levels in the 1990s.

"I am more than content to lower rates if that actually helps," Stevens said. "But is that the best thing to do at any particular time, that's the question that I frame."

But - can Stevens continue to ignore the slump in global commodity prices and the lingering risks to global risk?

Oil prices have plumbed 6 year lows while copper and the all-important iron ore price remain at historically surpassed levels. In short, risks remain and could get worse as this report confirms.

Therefore, having noted the cooling in property finance taking place we believe the RBA has more scope to act in the future and markets could soon start realising this.

The news certainly gives the RBA more ammunition to act in the future should the global environment deteriorate.

Risks of a cut in coming months has therefore grown in our view.