Unemployment decreases in May

In good news for the Australian economy, the national unemployment rate dropped 0.2 per cent to reach six per cent in May, according to the Australian Bureau of Statistics (ABS). In seasonally adjusted terms, this means an increase of 42,000 jobs to reach 11,759,600 employed across the country. With softer economic conditions dictating monetary policy decisions by the Reserve Bank of Australia (RBA), this could have interesting repercussions over the coming months.

As much as the cash rate decision affects real estate in Australia and the cost of home loans, it has much wider-reaching implications for the nation as a whole.

However, it is important to note that with the effect of the recent cash rate move still untested in terms of reported economic data, it is unlikely that the RBA will make any rash decisions. In his statement on monetary policy early in June, governor Glenn Stevens left the door open for changes to the official cash rate, pending assessment of market information, as it is made available.

Even with a slightly higher employment rate reported for May, wage growth has remained very low according to the RBA. While this has helped firms maintain their cost of labour and remain competitive, it would be more desirable for a correction in Australia's exchange rate to provide the impetus for internationally desirable products and services. If the reserve bank is successful in reducing the cost of the Australian dollar on the international exchange through jawboning and lower interest rates, firms may be able to invest more in their work force.

Of course, the desire for lower interest rates needs to be balanced against the effects it could have on other parts of the economy. For example, while cheaper home loans may stimulate real estate in Perth which is returning to more normal levels after the mining boom, they could equally have an affect on active markets such as Sydney and Melbourne. It is this balancing act which makes it hard to determine which course of action the RBA may consider next.

Where could the RBA go with this?

The Reserve Bank of New Zealand (RBNZ) is dealing with a similar situation, in that Auckland house prices are far-outstripping capital gains for real estate in other parts of the country. Average residential property in Auckland has appreciated in value by 16.1 per cent in the year to May 2015, according to the QV Residential Value Index. In comparison, homes for sale in Wellington have only gone up in price by 1.3 per cent over the same period of time.

Christchurch City has fared better than the New Zealand capital, at 3.8 per cent for the year, while Tauranga has experienced a surge in demand and homes have increased in price by 6.7 per cent on average.

The RBNZ has made very targeted moves to reduce risk in Auckland, while easing conditions in other areas of the country. Residential investors in the City of Sails could be facing a restriction of 30 per cent deposits - up from the previous 20 per cent limit placed on all home loans. The proportion of new loans exceeding a loan-to-value ratio (LVR) of 80 per cent has been limited to 10 per cent across the country, however the RBNZ moves to lift this to 15 per cent outside of the Auckland region.

"We are proposing these adjustments to the LVR policy to more directly target investor activity in the Auckland region, where house prices relative to incomes and rent are far more elevated than elsewhere in New Zealand," said RBNZ governor, Graeme Wheeler.

Glenn Stevens of the RBA has mentioned in every monetary policy decision statement this year that the reserve bank is working with other regulators to monitor the housing market. With the latest policy suggestions from the RBNZ, Mr Stevens and the board could be keeping a close eye on the housing markets across the Tasman. However, Australians have not voiced too much approval for the interventionary policies implemented in New Zealand so far.