Australia was the first major economy to raise rates, and the Australian central bank (RBA) was widely expected to raise again last week. They held, and it started a parlor game of why the dog hadn’t barked. The RBA’s explanation was clear in its obtuseness. Today the WSJ seems to have found the answer, and reported it not once but twice, here and here, with the following explanation:
Last month, China moved to reduce commercial bank lending and increase rates on some central bank bonds. Because a reduction of credit in China will ripple through to demand for Australia’s raw materials, China essentially did Australia’s tightening for it. …
Economists completely missed the bank’s intentions. All 20 economists surveyed by Dow Jones last Friday had forecast a rate increase.
If China tightening is bursting their housing bubble, will this now ratchet back to Oz? Mish has been on this issue, and notes that the Oz Prime Minister, Rudd, had pushed through a A$14,000 first-home buyer credit. Almost half of them are already struggling to make payments. Sydney is also rated the second least affordable major city, ranked by severity of housing. Rudd made the same serious blunder Barney Frank et al. did in the US, of spawning a govt-sponosred housing bubble, driving housing prices way too high. Recent tightening of the relaxed rules on down payments should cause a sharp decrease in home sales. This type of change drove UK prices down in 2008.
Steve Keen, one of the best economists in Australia, had forecast this drop by the end of 2009 – and lost a bet on it. Why? He hadn’t anticipated how far Rudd would go to keep the party going. Mish notes that once the trend changes, the party is over for a long time (5-7 years); but attempts to prolong the fun often lead to blow-off tips. We may be at that point right now. Here is a chart of how far people are stretching to join the real estate party in Oz: