Jobs high may bring rate rise nearer

The news of unemployment slipping to a new 32-year low is further good news for the economy and John Howard, but not so good for borrowers for whom it may portend another hike in their home loan interest rate. Unemployment fell to 4.2 per cent as jobs increased by another 13,000 in September. The jobs market continues to defy gravity with the participation rate going up and up in recent years, yet jobs being created for just about all of them.

This can only increase the chances of a further rise in interest rates, perhaps bringing it forward from next year to this year. If the inflation figures for the September quarter out later this month weren’t crucial already to the question of a November rate rise they certainly are now. Anything close to a 1 per cent rise in the CPI for the last quarter is likely to force the hand of the RBA, even in an election campaign. That would turn the government’s good economic news into a liability.

But a Melbourne Cup Day rate rise is no sure thing. The economy has shown itself pretty resistant to inflation pressures so far. And the RBA will also currently be trying to gauge the impact on the economy of tightened credit conditions from the US sub-prime lending shock, which have worked like a rate rise for some businesses and home borrowers.

Housing finance approvals rose 1.6 per cent in August, largely on the back of refinancings and purchases of existing homes. Approvals for loans to buy new dwellings fell marginally and is in keeping with the flat housing construction market.

The owner-occupier segment appears fairly healthy, excluding NSW, but a 4.5 per cent drop in the value of fixed loans, mainly the preserve of investors, is further evidence of one important driver of the housing market underperforming. Investors are certainly not crazy about property at the moment, the reality check from the last investment boom still fresh for some and the superannuation changes making this the retirement investment of choice for many now.

With high employment and immigration, the shortage of new housing stock is only getting worse, and the outlook for rents is only up.