Christopher Joye: You should be long housing right now, but beware regulatory risks; Aussie house price growth is accelerating, 8% annualised rate, way above wages growth
Yes, you should be long housing and other growth asset classes right now. But beware the regulatory risk, which it is apposite to highlight days before an election. Housing, in particular, is exposed to some unique headwinds that you should understand.
Regulatory hazards afflict all investments one way or another. If the Coalition repeals the mining and carbon taxes, many companies will benefit. New banking rules are deliberately designed to crimp leverage and excess returns.
Assuming away changes to the prevailing tax regime, there are several regulatory risks residential property investors, which includes all home owners, need to wrap their heads around.
The first is that the banking tsar – the Australian Prudential Regulation Authority (APRA) – decides to follow the lead set by New Zealand and explicitly intervene in the credit creation process by restricting the amounts banks can lend.
After sprightly house price growth across the Ditch fuelled by a 2.5 per cent cash rate, the Reserve Bank of New Zealand announced two weeks ago that the major banks will only be able to write 10 per cent of all their new loans above a loan-to-property value ratio of 80 per cent.
While this might not sound too tough, around one-third of all loans in Australia are settled above the 80 per cent LVR threshold. It is in practice a much bigger share than most people realise.
The surprisingly high leverage we take on when we purchase a home is partly mitigated by the fact that these mortgages have unusually long terms over which they can be repaid – typically 25 to 30 years.
According to the latest data from New Zealand, house prices across that country rose by 8.6 per cent in the 12 months to July. Over the same period, Australian home values inflated by 5 per cent, says RP Data.
But here’s the rub: Aussie house price growth is accelerating. In 2013 capital values across all regions have climbed at an 8 per cent annualised rate, which is way above wages growth.
The RBNZ governor went on to say that “household debt – at 145 per cent of household income – is also high”. Yet it is actually loftier again in Australia at 147 per cent, and evinces no sign of abating.
On the relative valuation of the two markets, analysis published by the Reserve Bank of Australia finds that “house-price-to-income” ratios are comparable at between four and five times.
This invites the question: if current Australian house price growth and household leverage are higher than their New Zealand counterparts, and home loan rates and the jobless rate here are lower, why is the RBA so relaxed about housing-induced financial stability risks?
A member of its august board, John Edwards, claimed this week that “we are a long way from [housing] being a problem.” Even as he spoke, Sydney home values were expanding at almost a double-digit annual clip, with auction clearance rates punching near a boom-like 80 per cent.
The RBA’s official comfort reflects an underlying policy conundrum.
On the one hand, it now belatedly buys into the argument that we require the prospect of capital gains to stimulate investment in the housing market’s otherwise inert “supply-side”, which has to produce enough homes to accommodate a 60 per cent increase in our population over the next 35 years.
The RBA also thinks that reinvigorated housing construction could help the economy transition to a broader base of growth as mining investment cools.
On the other hand, the RBA was one of the most aggressive central banks in the world to claim – after the event – that unnecessarily easy monetary policy induced bubbles in asset prices that were key drivers of the 2008 crisis.
Using this logic, the two top guys at the RBA, Glenn Stevens and Philip Lowe, have for years championed the view that central banks should use interest rates to “lean against” burgeoning bubbles that can destabilise the wider financial system.
So the first, and most likely, risk for property investors is that APRA starts stealthily throwing sand into the wheels of bank lending by either imposing NZ-style caps, or simply forcing banks to hold more capital against riskier loans, which will dampen their desire to make them.
After the RBA cut rates in May I warned that this was a possibility. I now think it is almost inevitable.
Straight talk from Chris Joye. fwiw I bet he is right about most of that.
Apart from the suggestion to go long. We face unprecendented ageing headwinds and any prediction must be weighted up against the bank of Int settlements who project asset headwinds for many decades to come. So, who do you trust?
Apart from the suggestion to go long. We face unprecendented ageing headwinds and any prediction must be weighted up against the bank of Int settlements who project asset headwinds for many decades to come. So, who do you trust?
you really are a single issue OCD type of weirdo aren't you pauk.
it's all about the evil boomers for you.
I am the love child of Tony Abbott and Pauline Hanson
Catweasel say Chris the Joye know as brilliant man-child in a Australia.
others might call them shills but when someone has had the white shoe experience of people like Joye or even Kudlow i will at least give some serious consideration to what they are saying
there's little doubt we are going to have some feel good moments for at least a short while longer Cat. I have long said that 'the price of money matters' but nobody here takes me seriously... I understand why that is and am totally fine with it - actually in some ways i prefer it.
others might call them shills but when someone has had the white shoe experience of people like Joye or even Kudlow i will at least give some serious consideration to what they are saying
there's little doubt we are going to have some feel good moments for at least a short while longer Cat. I have long said that 'the price of money matters' but nobody here takes me seriously... I understand why that is and am totally fine with it - actually in some ways i prefer it.
Did you visit lake wendouree on the weekend?
Catweasel say a "feel good" is rammed down mouse throat,
like force-feed the goose for the foie gras.
If it pretty the narrative,
like lipstick on pig,
it can also introduce boogeyman into narrative.
And mouse might be spooked by potential existence,
its emotions are harnessed by evidence of prophetic the wisdom,
focused on cast of player like master and other assorted guru.
Taken from another thread on Lehman's 5 year anniversary, this comment sums up the situation for me:
What is surprising is that, five years after the crisis, and four years after disrupted financial markets resumed their normal functioning, western economies still overwhelmingly rely on central banks to avoid even worse economic performance. This has pushed central banks away from their core competencies as they have been forced to use partial and imperfect policy tools for quite a long time...http://www.theguardian.com/business/economics-blog/2013/aug/28/five-years-lehman-brothers-collapse
We are far too reliant on central banks.
People have become so conditioned to the idea that there is no place for volatility - or 'fragilized' as Nassim Taleb would say.
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