Reality check coming for the RBA

I’ll get to the economic outlook shortly. First, I want to touch on what’s becoming a big problem. Property prices are not only growing more than income, they’re growing a lot more than savings.

Sydney’s median house price is now $1.6m. That means for a 20% deposit, a buyer needs $320k plus stamp duty. If they don’t, they’ll need to pay tens of thousands more in mortgage insurance.

Government grants like the First Home Guarantee (FHBG) are an excellent attempt, but they fall short because the terms and caps make them very limited. In Sydney, the scheme caps at $900k purchase price. I know the market doesn’t all revolve around Sydney, there are many other options and places that people can live.

But I’m generalising for simplicity. The current government schemes are only really applicable to apartments. If you want to buy a house, you either need a 20% deposit ($200-350k depending on city) or you’ll pay big loan mortgage insurance which limits your borrowing capacity.

I can see more innovation in this area over the next few years, it’s something we’re focusing on in our businesses. Lenders are innovating, government will need to catch up. The market has already moved on.

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On the markets front, my video this week summarises the latest GDP numbers, which show just how poor Australia is doing. We’re falling further behind which GDP rising only 0.2% over the last quarter. Things will be worse this quarter, given RBA choking consumers and the pullback in commodity prices in recent weeks.

We’re heading for zero growth and unless the RBA starts to act decisively, Australia will be in a recession by the end of the year. Business inventories are a good indicator of what’s to come, they dipped 1.7% in the December quarter. Not a good result.

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Bottom line: My base case is still for interest rates to start falling towards the mid-third quarter of this year as unemployment rises, retail sales fall and economic growth evaporates. I just hope that the RBA isn’t too late to the game and blinded by their irrational inflation obsession.

Peter Esho is an economist and Founder of Esho Capital. He has 20 years of experience in investments and markets.