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Rate cut fails to stimulate

zoë fielding

The Reserve Bank met market expectations in December, after failing them in November, and cut rates by a quarter of a percentage point to 3 per cent.

Reserve Bank governor Glenn Stevens has said he expects housing construction to be a potential source of economic growth after investment in the mining sector slows down towards the end of 2013 or in 2014 so he’ll be hoping for a recovery.

But building approvals fell by 7.6 per cent between September and October 2012, according to Australian Bureau of Statistics figures, also released on Tuesday. Western Australia was the only market in which approvals were up.

Rates cut but approvals fall

The Housing Industry Association said while the drop was disheartening, the ongoing weakness should be of greater concern.

“Over the three months to October compared to the same period in 2011, approvals increased for semi-detached dwellings and units of one or two storeys, but were flat for detached houses and fell heavily for medium/high density units,” HIA chief economist Harley Dale said in a statement.

“That kind of profile doesn’t give you a sustained recovery in new residential construction and certainly doesn’t give you a signal of a sector poised to help fill the void left by a turnaround in the mining investment cycle.”

Economists at AFR Smart Investor’s round table discussion on the outlook for 2013 agreed that interest rate cuts were having a less stimulating effect on households than in the past. That was partly because people have been using the cuts to pay off debt faster rather than increasing their appetite for borrowing. MLC investment strategist Michael Karagianis pointed out that as more Australians retired, there were more people who relied on interest from their bank accounts for income, so cuts actually curbed their spending potential. (See the January issue for more).

Banks dilute interest rate impact

Laing+Simmons general manager Leanne Pilkington said the Reserve Bank had lost its fire power to stimulate housing market activity as the banks were either not passing on the cuts, or passing on only a fraction of them.

“The net result is that interest rate cuts at the Reserve Bank level are not having an impact. The subdued levels of transactional activity, despite the official cash rate being at historical lows, not only emphasises the caution among buyers but also the lack of stock on the market,” Ms Pilkington said.

“The end result of the lack of consumer confidence – and trust – in the banks is that more people are staying put, fewer first home buyers are taking the first step to ownership, and those in need of an upgrade are hesitant to make a move in the current climate.”

Company fallout

Some listed companies have been suffering with the weak housing market.

Shares in building materials companies Boral and Fletcher Building fell by about 1.5 per cent on Tuesday as the ABS construction figures were released.

Stockland Property Group, a diversified property company with a large exposure to residential development, told its investors on Tuesday morning that there had been no improvement in the challenging Victorian residential market since October. It said unless the market in the state improved soon, which seemed unlikely, its underlying earnings per security for the 2013 financial year would be at the low end of its previously guided range of 10-15 per cent below FY12.

That announcement was the latest in a series of earnings downgrades that Stockland has issued in the past few months due to weak conditions damaging its residential business, and sent its shares tumbling 7¢ to $3.33 in early trading.

What should you do?

Join the masses and take the opportunity to pay down debt at a lower cost, or boost the economy by jumping into the housing market. With rates low and markets depressed, there could be some good buys around, although rental yields are still quite low despite tight vacancy rates.

If you’ve got stocks in the sectors exposed to the construction and housing sectors, keep an eye on them. It doesn’t look like there will be much action in the building sector for some time yet.

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