Do interest rates need to fall to "kick start" new building and get the property market back on its feet? Not at all, according to the ANZ Australian Property Outlook for July 2006.
Ange Montalti, Senior Economist, Financial Systems Analysis, ANZ said that, since 1970s, every housing market upturn has been associated with some coincident or leading downward adjustment to interest rates.
"This makes it very easy to argue on the circumstantial evidence that for housing to recover, the RBA must loosen monetary policy", said Montalti.
"However, one could also argue that over this period, we did not experience the counter-factual scenario - a scenario of extended stability in interest rates. Given the rate cycle has typically been a relatively short one, peaking on average every 4 years since the late 1960s, we cannot know the behaviour of the housing construction cycle over an extended period of stability in interest rates."
"We are currently staring down the barrel of the longest period without a rate cut (last rate cut was in 2000/01). Since the 1960s, this presents us with our first opportunity for a long time to find out!"
Furthermore, cycles in both dwelling activity and interest rates between the early 1970s and the early 1990s were incredibly volatile, characterised by large swings in both directions - the housing market would move from oversupply to pent-up demand and back again.
Since the mid 1990s, however, interest rate movements had been relatively stable and while the dwelling cycle appears to be playing the "old game", the distorting effect of GST implementation in 2000 have probably overstated the underlying amplitude of the cycle.
"We have to go back to the mid-1950s to 1970 period to evidence two housing upturns that were not triggered by interest-rate falls", said Montalti.
"Interestingly, the interest rate track of this earlier period resembles very much how the current track is playing out - low and relatively stable. What was driving those early cycles was very strong population growth and underlying demand. Building activity was responding to the need to house a growing population. Similar fundamentals are with us today and the market, we believe, is not going to wait for interest rate falls to begin rectifying the demand/supply imbalance", he said.
The study is available at http://www.anz.com/Business/info_centre/economic_commentary/PropertyOutlookJuly2006.pdf.
