Home loans, consumer confidence in Australia rise on rate cuts

Source : Business Times - 9 Apr 2009

They add to global signs dubbed ‘green shoots’ by Fed chief

Australian home-loan approvals rose for a fifth month and consumer confidence jumped by the most since August, adding to signs a record round of interest-rate cuts and government handouts are boosting the economy.

The number of loans granted to build or buy homes and apartments climbed 0.4 per cent in February, the statistics bureau said in Sydney yesterday. Westpac Banking Corp’s index of consumer sentiment gained 8.3 per cent in April.

Yesterday’s reports prompted investors to boost bets that the central bank’s cycle of rate cuts, which have taken the benchmark lending rate to a half-century low, may be coming to a close.

Australia’s improving consumer confidence and record demand for homes from first-time buyers add to a series of global indicators that US Federal Reserve chairman Ben Bernanke described last month as ‘green shoots’.

‘These are positive signals for policy-makers’ said Ben Dinte, an economist at Macquarie Group Ltd in Sydney. They also support the Reserve Bank of Australia’s view ‘that the significant stimulus already provided will support demand in the year ahead’.

Traders have reduced bets on the size of future Reserve Bank rate cuts, according to a Credit Suisse Group index based on swaps trading.

Traders forecast the overnight cash rate target will be one basis point lower in 12 months, the index showed at 3.07pm in Sydney. Late on Tuesday, they were tipping 28 basis points in cuts, and at the start of April they expected 64 basis points.

While the economies of the Organisation for Economic Co-operation and Development face the steepest contraction in more than 50 years, recent reports have boosted speculation a recovery will begin this year.

In the United States, sales of new homes unexpectedly rose in February by 4.7 per cent, and factory inventories are falling. The rate of contraction in European manufacturing and services industries is slowing and new bank lending quadrupled in China in February as vehicle sales increased 25 per cent.

Mr Bernanke told CBS Corp’s ‘60 Minutes’ programme on March 15 that he sees ‘green shoots’ in some financial markets, and the pace of economic decline ‘will begin to moderate’.

Australia’s benchmark S&P/ASX200 stock index rose 7.1 per cent in March, the first monthly gain since August. Standard & Poor’s 500 Index of US stocks surged 8.5 per cent last month, the most in seven years.

‘Interest rates at these low levels and a recovery in housing construction will lead the economy out of recession, as in past cycles,’ economists at Westpac, including chief economist Bill Evans, said yesterday.

Australia’s mortgage rates are now at ‘very low levels by historical standards’ and, along with a surge in government spending, will provide a significant boost to the economy, central bank governor Glenn Stevens said on Tuesday.

Policy-makers cut the benchmark rate on Tuesday by a quarter point, taking the total reductions since September to 4.25 percentage points.

To prevent Australia’s property market following the US and UK into a slump, the government in October tripled a grant to first-time buyers of new homes to A$21,000 (S$22,655).

Yesterday’s reports suggest the measures are having an impact. First-home buyers accounted for a record 26.9 per cent of dwellings financed in February. Home-building approvals also rose in February for the first time in eight months.

Households with an average-sized mortgage of A$250,000 are paying at least A$7,000 a year less than they were six months ago, which is equal to 8 per cent of average family incomes, according to Reserve Bank calculations.

The number of Australians facing mortgage stress, or loan repayments of more than 30 per cent of their household income, has fallen by 300,000 from its peak last August, according a report by Fujitsu Consulting.

Tuesday’s quarter-point reduction in the benchmark rate would have reduced repayments for those households by another A$480 a year if passed on in full by lenders.