The RBA has revealed that stabilising house prices were a factor in its surprise decision to keep the official cash interest rate on hold this month.

Recently released minutes from the monetary policy meeting of the Reserve Bank Board reveal a generally upbeat assessment of the challenges facing the Australian economy, including the observation that housing prices showed some stabilisation around the end of 2011, “after having declined for most of the year”.

“While housing prices had declined over 2011, there were signs of stabilisation in some major cities around the end of the year," said the minutes.

The Board did note, however that construction remained subdued due to the pull-forward from the earlier boost to grants to first home buyers, slower population growth, tight access to credit for developers and lowered expectations of capital gains.

In another sign of subdued property market conditions, it was also noted that “housing credit continued to grow a little more slowly than household incomes.”

Resources lead the way

Away from the major cities, property investors who are eyeing up mining towns will be interested to hear the RBA’s comment that investment in the resources sector was expanding at a rapid pace – with the investment-to-GDP ratio expected to reach its highest level in at least half a century.

Queensland and WA investors will note that Australia’s Liquefied natural gas (LNG) industry was singled out for special attention by the RBA, with the Board noting that the total value of LNG projects approved or under construction has now reached around $180 billion.

Queensland’s coal mining regions, however, have yet to see their exports reach pre-flood levels: “The recovery in coal production had also taken longer than initially expected,” said the minutes.

Perhaps unsurprisingly, given the investment flowing into the state’s resource sector, WA appeared to be leading the pack in terms of its economic recovery, with the RBA noting that retail spending “was growing much faster in Western Australia than in other states”.

Overall, the RBA observed that confidence in the economy was on the up.

“Consumer sentiment had picked up over recent months after its sharp decline in mid-2011, but remained slightly below its long-run average,” said the minutes.

Some industries are faring better than others however, and the Board singled out real estate as one of the sectors that has experienced a decline in employment in recent months.

Improving global outlook

Overseas, the Board found several reasons for Australians to take a positive outlook of things to come. These included:

  • Growth in emerging economies, particularly Asia, was expected to be much stronger than in advanced economies – meaning average growth in Australia's main trading partners was expected to be around 1% higher the worldwide figure.
  • Activity in the US has strengthened recently, with GDP growth picking up in the December quarter after a soft patch earlier in 2011.
  • Recent actions by the European Central Bank and euro-area governments have boosted confidence.

But uncertainty persists, with the RBA noting that “the potential for a disorderly resolution of the sovereign debt problems in Europe remained the major downside risk for the global and domestic economies”.

A fall in prices and activity in the Chinese property market, too, was seen as a global concern.

“A key ongoing uncertainty was the possibility that the slowing in the Chinese property market would have larger-than-expected ripple effects throughout the broader economy,” said the minutes.

Rate rises next year?

The RBA gave off mixed signals with regards to future interest rate calls. While the Board judged that “if demand conditions were to weaken materially, the inflation outlook would provide scope for a further easing in monetary policy”, it was also observed that “from the September quarter 2012, inflation would be boosted by the introduction of a price on carbon.”

The carbon tax effect was expected to add 0.7% to headline inflation and around 0.25% to underlying inflation in 2013. Should this push inflation beyond the RBA's target band, it may decide to raise rates next year.

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