Reserve Bank of Australia Will Meet to Determine the Price of Money

If you were expecting the week to begin with a new age of thrift, prudence, and frugality, too bad! Australians opened their wallets and shelled out nearly $20 billion in retail spending in May. It was a one percent increase over the month before. It is also a testament to the power of government to distort reality by giving away other people’s money.

This denial of reality should be interesting to watch. When a credit bubble deflates and an economy breaks its addiction to reckless debt, the sensible thing to do (since you’re repairing your balance sheet) is dial things back a bit. Save. Cut back on the gadgets. Eat more staples. Wear a sack cloth.

But if you still believe that you can get something for nothing-well then yes-you’d continue to borrow and spend like a madman.

Speaking of borrowing, we’ll have an idea tomorrow of whether borrowing costs are headed up, down, or nowhere. The Reserve Bank of Australia meets to determine the price of money (in whatever mysterious way it manages to do this).

It will have to consider another piece of data from last week: a 12.5% seasonally adjusted decline in building approval for new homes. This is a provocative little nugget, isn’t it? That’s a steep month-over-month drop. Year-over-year, total approvals for new homes fell 22.4%. But wait…there’s more!

Approvals for multi-unit “other” dwellings fell 43.6% month-over-month and 57.5% year-over year. We assume this means multi-room apartments and not houses. But either way, that kind of one-month decline looks an awful lot like hitting a brick wall. The Australian Bureau of Statistics says that’s the lowest level of approvals since 1987.

What could it mean? There may be a perfectly reasonable explanation for such an ugly number. One that comes to mind immediately is that developers think there is plenty of existing inventory already (much of it unoccupied). With a large supply on hand, why build more?

Another reason is that developers don’t expect prices to rise higher. Why add more new housing stock if you conclude that A.) the housing market is adequately supplied (not short, as is so often claimed) and B) the demand for new mortgages (new housing finance) is also going to fall off a cliff when the first home buyer’s grant expires or interest rates begin rising (whichever comes first).

Dan Denning
for The Daily Reckoning Australia

Similar Posts:

• Australian Banks Must Increase Fees or Expand Loans to Remain Profitable
• Economy Free to Recover?
• Job Losses From Private-sector Rose Since Beginning of Recession
• Revolving Credit Commitments Down 19.4% in March
• Traders Sell Bank Stocks Due to Goldman Sachs Surprise

Read more….