House Price Bull Heaven: Australian property bubble inevitable say top economists; House prices continue to move solidly higher. It is nearly as good as it can get for housing bulls.
Tweet Topic Started: 18 Sep 2013, 09:35 AM (2,275 Views)
Two top economists have called on regulators to rein in lending to avoid a housing bubble in a sign of the growing momentum for credit controls on the major banks and other lenders.
Former Reserve Bank of Australia board member Bob Gregory said a property bubble seemed “inevitable” and Melbourne University professor Ross Garnaut said making banks set aside extra capital would be “simple and logical”.
Minutes from the last Reserve Bank of Australia board meeting revealed the central bank’s concerns about the safety of property investments.
The board members noted that DIY superannuation funds used to invest in property could be “starting to take some risk with their finances”, a sign the Reserve Bank is worried low-tax super accounts are contributing to property speculation. The central bank plans to step up vigilance of banks’ lending standards in what amounts to an admission of the risk of a housing bubble caused by its record low 2.5 per cent cash rate.
“In the current environment of low interest rates and slow credit growth, members agreed that it was especially important that banks maintained prudent lending standards,” the Reserve Bank’s board noted at the meeting on September 3.
Prominent SQM Research property analyst Louis Christopher predicted housing prices nationally could rise as much as 18 per cent in 2014 if the economy strengthens.
Sydney is “turning into a beast unto itself” with likely increases of between 15 and 20 per cent, he said, and potentially as much as 30 per cent if the economy recovers strongly. Melbourne and Brisbane house prices would rise between 4 and 7 per cent under SQM’s conservative-case scenario only one, or no, further cuts in official interest rates.
“Such a rise will create a large dilemma for the RBA, especially if the national economy is still running below average growth,” Mr Christopher said.
“Would they lift rates if consumer and business confidence was still in the doldrums?”
Professors Gregory and Garnaut told The Australian Financial Review regulators should consider measures to limit bank lending, using what are increasingly known around the globe as “macroprudential tools”.
“If you are worried about the risk of a bubble in the housing market, the simple and logical thing to do is remove the privileged risk-weighting of housing in bank capital adequacy ratios,” Professor Garnaut said.
“That puts it on them to be careful as capital costs them more.”
Banks are required to set aside a certain amount of capital as protection from financial shocks. Because mortgages are seen as mostly safe, they don’t have to set aside as much capital as for more risky assets such as commercial loans.
On Monday the International Monetary Fund called for tougher lending rules globally to stop banks fuelling house price bubbles. New Zealand and other countries are already limiting lending to higher-risk home buyers.
Professor Garnaut is among a growing number of experts arguing in favour of a more interventionist approach to bank lending, rather than relying on interest rate hikes to pop investment bubbles after they form.
“We want to remove constraints on interest rate reductions,” he said. “The broader economy is doing shithouse but most importantly what the broader economy needs is a lower exchange rate.”
Despite 2.25 percentage points of official rate cuts between late 2011 and last month, the dollar has rebounded against the US currency and traded at US 93.19¢ late on Tuesday.
Professor Gregory, who was a member of the Reserve Bank board between 1985 and 1995, said the current situation reminds him of the late 1980s, when surging asset prices forced the central bank to jack up interest rates to record highs.
A property bubble “just seems to be inevitable,” he said. “The only question is when. Everyone is hoping that the economy will recover soon enough and quick enough that we can reverse the stance of [monetary] policy.
I have been having a good look around Perth. I notice lots of sold signs on houses. They are selling. City Beach was like every single house had sold. Peter :pop:
“If you are worried about the risk of a bubble in the housing market, the simple and logical thing to do is remove the privileged risk-weighting of housing in bank capital adequacy ratios,” Professor Garnaut said.
“That puts it on them to be careful as capital costs them more.”
What a stupid statement.
Increase the risk weighting, then the banks will increase the margin. The banks target an ROE, and RBA responds by lowering interest rates since the RBA targets the commercial and mortgage rate.
Nothing changes except savers get stiffed (again).
Economists should be banned from talking about banks. They are clueless.
Increase the risk weighting, then the banks will increase the margin. The banks target an ROE, and RBA responds by lowering interest rates since the RBA targets the commercial and mortgage rate.
Nothing changes except savers get stiffed (again).
Economists should be banned from talking about banks. They are clueless.
stinkbug omosessuale Frank Castle is a liar and a criminal. He will often deliberately take people out of context and use straw man arguments. Frank finally and unintentionally gives it up and admits he got where he is, primarily via dumb luck! See here Property will be 50-70% off by 2016.
Investing in property is a no-brainer at the moment. Prices have bottomed, auction clearance rates are on fire, especially in Sydney, and you can get a fixed rate mortgage for 4.8 per cent with 100 per cent gearing, 70 per cent in your super fund.
And the experts are now saying there’ll be another housing bubble. What could be better?
There’s no sign of a housing bubble yet: values are only just back to where they were three years ago. Will there be one next year or the year after? Who knows? But one sure way to make it happen is to sternly warn about one.
By way of confirmation, a lot of the coverage of yesterday’s Reserve Bank minutes plucked out the comment that: “Property gearing in self-managed superannuation funds was one area identified where households could be starting to take some risk with their finances.”
Yes, well, you’d be mad not to move some of your DIY super money from bank shares into geared residential property.
The bank share index is up 54 per cent in the past 12 months while the median house price is up 7 per cent over the same period. If there’s a bubble it’s in high-yielding shares, especially banks; it’s time to take the profits and put them to work in the next bubble.
The main problem with housing in Australia is that we never build enough of them, and the main problem with the Australian economy is not housing – it’s that it’s begun a transition from resource investment-led growth to … well, hopefully something else.
In the United States between 2002 and 2007, low interest rates led to a boom in both house prices and house building. They ended up with a glut of houses and prices collapsed: you could famously buy a house for the price of a second-hand car.
In Australia over the same period there was a house price boom and that’s it – no glut. In fact there has been a consistent shortage of housing in this country right through the boom and bust of at least 100,000 per annum. As a result prices didn’t fall much and have started rising earlier than in the US.
Why is there a persistent shortage of housing in Australia when it’s the 3rd least densely populated nation on earth? (Mongolia and Western Sahara are less dense).
Good question. The reasons are complicated and probably boil down to a lack of spending on infrastructure by state governments and planning restrictions by local councils.
Why are people in outer suburbs, especially western Sydney, so grumpy that during the election campaign politicians are thick on the ground, wearing holes in the carpets of motels there? Because they can’t get around because the roads are clogged and schools, hospitals and shops are miles away.
So Australia has a housing supply-side problem that means the definition of a price bubble is distorted. Bubbles only occur when supply exceeds demand. Just because a price rises a lot, that doesn’t mean it’s a bubble if there’s a shortage.
So what about the issue that, according to yesterday’s minutes, the RBA board spent most of its time talking about this month?
For example: “Members noted that, based on a profile for projects derived from the bank's liaison and public statements by mining companies, the staff assessment was that mining investment was likely to decline noticeably over the next few years from its recent very high levels.”
That’s Australia’s real problem.
In 2001 when China entered the World Trade Organisation, gross fixed capital formation, or investment, broadly defined, represented 18 per cent of our GDP. Ten years later it was 28 per cent, having contributed about 1.5 percentage points to the average annual GDP growth of 3.1 per cent since 2001.
Since the GFC the proportion of our economic growth contributed by investment has been even greater – 1.4 percentage points out of 2.7 per cent.
Australia’s great investment phase is now over, and capital expenditure on non-dwelling construction and plant and equipment is falling. Half of our GDP growth of the past 12 years is in the process of disappearing.
As the Reserve Bank minutes noted yesterday, housing construction has “increased moderately”, but household consumption had been “below average”. Wages growth has eased and as a result of the declining terms of trade, national income has fallen.
So GDP growth is below trend and its main prop is being pulled away. We just have to hope that stable government – if that’s what we get with all blokes in charge – improves consumer and business sentiment, and that the dollar falls some more so that investment in manufacturing, agriculture and tourism increases.
Low interest rates aren’t getting much traction because they’re feeding into house prices, not house building, and borrowers are not using the lower rates to cut their repayments so they can spend more.
Apart from that, the new government has to find a way to persuade super funds – both SMSF and public offer – to invest in building things rather betting on rising asset prices, and since asset prices are indeed rising, that won’t be easy.
Treasurer Joe Hockey has been talking about infrastructure bonds where the Commonwealth guarantees some of the risk. Good idea. Get on with it.
House prices are continuing to move solidly higher, driven by record low interest rates, a shortage of supply, strong underlying demand, rising incomes and a lift in wealth coming from a buoyant stock market.
It is nearly as good as it can get for the house price bulls.
About the only thing working against an even more powerful rise in house prices is the recent softness in the labour market, where employment has fallen in the last two months and the unemployment rate has increased by around 1 percentage point over the past year to 5.8 per cent. If the labour market was stronger, house prices would no doubt be rising at an even faster pace.
At the start of the year, most of the dynamics were already in place for house prices to rise strongly and it seemed likely that they could rise by 10 per cent or so in 2013 (All signs point to a house price hike, January 10).
According to the RPData series, house prices are up 1 per cent so far in September and by 6.1 per cent since the start of the year. The 10 per cent increase for 2013 looks to be in the bag.
The question now is where to for house prices in 2014 and beyond? Is the rise in house prices threatening to distort investment decisions and therefore is it a threat to the stability of the financial system and the economy?
For now, the Reserve Bank is not all that fussed with the recent house prices gains, particularly when the recent rise is set in the context of the 7 per cent fall up to early 2012. In the minutes of the September board meeting released yesterday, the Reserve Bank noted the house price gains and that “recent data and information from liaison were consistent with further recovery in the established housing market and moderate growth in dwelling investment”.
The Bank’s minutes did have a particularly interesting inclusion. They noted that the board “was briefed on developments in the New Zealand housing market and the macroprudential policy framework recently introduced by the Reserve Bank of New Zealand” (New Zealand’s bold move against the housing bubble, August 21).
It is not clear whether the Reserve Bank would ever embrace such macroprudential changes, given its assessment that “the Australian banking system remained in a relatively sound position. Banks were well placed to meet the Basel III capital requirements... Members observed that banks' asset performance and funding structures continued to improve, and their profitability remained strong”.
This was a cool and calm assessment of the soundness of the financial system.
Critically for consideration of any concern (or the lack thereof) about a housing bubble, the Reserve Bank board minutes noted the “continued high rate of excess home loan repayments was consistent with low rates of financial stress among households with mortgages”. In other words, there are fewer concerning signs of financial stress in the financial system.
Whatever the merits of the government or Reserve Bank considering non-monetary policy means to deal with any future unwelcome rise in house prices, it won’t take too many more solid monthly house price gains for the central bank to become antsy about the risks from what soon might be excessive growth.
While there is probably something to be said for some steps along the macroprudential path not only to take some of the heat out of house price gains, but also for reasons linked to stability in the banking and finance sector, good old fashioned interest rate hikes will also do the job, albeit with consequences for the economy away from housing.
The case for regulatory changes to tackle house price rises also loses weight given that housing credit growth is particularly slow at the moment and there is not a lot of evidence that the recent pick up in house prices is being driven by leverage. Another issue working against a macroprudential regulatory change is that it imposes another layer of red tape on mortgage providers and business and it might not even work.
As has been demonstrated over the ages, price signals in markets work better than regulatory changes. Witness the success of the carbon price in reducing per capita electricity consumption and the increase in clean energy output over recent times.
For housing, those price signals come through higher interest rates which reduce affordability and raise the cash flow required by borrowers to fund a given level of debt. Less is borrowed, which dampens house price gains. Interest rate changes are clean, transparent, easily understood and do not impose a red-tape complication for borrowers or lenders.
Whatever the approach that may be taken, house price growth would need to accelerate further for it to become a problem. In the meantime, there is plenty else happening in the economy which may yet see the Reserve Bank move to a tightening bias and even deliver an interest rate hike early in 2014. The economy is lifting, global conditions are improving and inflation risks just might be moving up rather than down for the first time in more than four years.
Either way, as Reserve Bank governor Glenn Stevens starts his second term at the top, the community can rest assured he and his board will get things right whenever they feel the need to adjust policy or if or when house prices become a problem.
Australian regulators are under pressure from two senior economists to take a proactive approach in curbing lending amid growing concerns over a potential housing bubble, according to The Australian Financial Review.
The warnings, from former Reserve Bank of Australia (RBA) board member Bob Gregory and Melbourne University professor Ross Garnault came as the latest RBA meeting minutes revealed concerns within the central bank's board over the property sector.
“If you are worried about the risk of a bubble in the housing market, the simple and logical things to do is remove the privileged risk-weighting of housing in bank capital adequacy ratios,” Mr Garnaut told the AFR.
“That puts it on them to be careful as capital costs them more.”
Mr Gregory said the current property landscape was reminiscent of the late 1980s when rising asset prices forced the RBA to raise interest rates to fresh record highs.
He added that a housing bubble “just seems to be inevitable”.
“The only question is when,” he told the AFR.
“Everyone is hoping that the economy will recover soon enough and quick enough that we can reverse the stance of [monetary] policy.”
Banks warn on lending limits
Banks say lending restrictions to address concerns record low interest rates could cause a property price bubble would hurt first home buyers, The Australian Financial Review reports.
According to the newspaper, Australian Bankers' Association chief executive Steven Münchenberg said there was no sign banks were relaxing lending standards, and New Zealand-style lending limits would affect first home buyers.
The Reserve Bank of Australia's September meeting minutes released yesterday said members agreed it was important for banks to maintain prudent lending standards in an environment of low interest rates and slow credit growth.
Increase the risk weighting, then the banks will increase the margin. The banks target an ROE, and RBA responds by lowering interest rates since the RBA targets the commercial and mortgage rate.
Nothing changes except savers get stiffed (again).
Economists should be banned from talking about banks. They are clueless.
Not to mention, the risk weightings are supposed to be representative of the actual risk and are designed to make sure that when banks fail, depositors get their money back.
They are not a policy tool. They are supposed to be in line with reality.
The truth will set you free. But first, it will piss you off. --Gloria Steinem AREPS™
Increase the risk weighting, then the banks will increase the margin. The banks target an ROE, and RBA responds by lowering interest rates since the RBA targets the commercial and mortgage rate.
Nothing changes except savers get stiffed (again).
Economists should be banned from talking about banks. They are clueless.
Not to mention, the risk weightings are supposed to be representative of the actual risk and are designed to make sure that when banks fail, depositors get their money back.
They are not a policy tool. They are supposed to be in line with reality.
Yes - good point.
It reminds me of that other hairbrained idea - a tax for deposit insurance.
Apart from the fact the RBA can stand behind every single AUD liability in the system without taxpayer support, the Banks were always going to pass the tax on to the very taxpayer who was providing the "insurance".
Australian Property Forum is an economics and finance forum dedicated to discussion of Australian and global real estate markets and macroeconomics, including house prices, housing affordability, and the likelihood of a property crash. Is there an Australian housing bubble? Will house prices crash, boom or stagnate? Is the Australian property market a pyramid scheme or Ponzi scheme? Can house prices really rise forever? These are the questions we address on Australian Property Forum, the premier real estate site for property bears, bulls, investors, and speculators. Members may also discuss matters related to finance, modern monetary theory (MMT), debt deflation, cryptocurrencies like Bitcoin Ethereum and Ripple, property investing, landlords, tenants, debt consolidation, reverse home equity loans, the housing shortage, negative gearing, capital gains tax, land tax and macro prudential regulation.
Forum Rules:
The main forum may be used to discuss property, politics, economics and finance, precious metals, crypto currency, debt management, generational divides, climate change, sustainability, alternative energy, environmental topics, human rights or social justice issues, and other topics on a case by case basis. Topics unsuitable for the main forum may be discussed in the lounge. You agree you won't use this forum to post material that is illegal, private, defamatory, pornographic, excessively abusive or profane, threatening, or invasive of another forum member's privacy. Don't post NSFW content. Racist or ethnic slurs and homophobic comments aren't tolerated. Accusing forum members of serious crimes is not permitted. Accusations, attacks, abuse or threats, litigious or otherwise, directed against the forum or forum administrators aren't tolerated and will result in immediate suspension of your account for a number of days depending on the severity of the attack. No spamming or advertising in the main forum. Spamming includes repeating the same message over and over again within a short period of time. Don't post ALL CAPS thread titles. The Advertising and Promotion Subforum may be used to promote your Australian property related business or service. Active members of the forum who contribute regularly to main forum discussions may also include a link to their product or service in their signature block. Members are limited to one actively posting account each. A secondary account may be used solely for the purpose of maintaining a blog as long as that account no longer posts in threads. Any member who believes another member has violated these rules may report the offending post using the report button.
Australian Property Forum complies with ASIC Regulatory Guide 162 regarding Internet Discussion Sites. Australian Property Forum is not a provider of financial advice. Australian Property Forum does not in any way endorse the views and opinions of its members, nor does it vouch for for the accuracy or authenticity of their posts. It is not permitted for any Australian Property Forum member to post in the role of a licensed financial advisor or to post as the representative of a financial advisor. It is not permitted for Australian Property Forum members to ask for or offer specific buy, sell or hold recommendations on particular stocks, as a response to a request of this nature may be considered the provision of financial advice.
Views expressed on this forum are not representative of the forum owners. The forum owners are not liable or responsible for comments posted. Information posted does not constitute financial or legal advice. The forum owners accept no liability for information posted, nor for consequences of actions taken on the basis of that information. By visiting or using this forum, members and guests agree to be bound by the Zetaboards Terms of Use.
This site may contain copyright material (i.e. attributed snippets from online news reports), the use of which has not always been specifically authorized by the copyright owner. Such content is posted to advance understanding of environmental, political, human rights, economic, democratic, scientific, and social justice issues. This constitutes 'fair use' of such copyright material as provided for in section 107 of US Copyright Law. In accordance with Title 17 U.S.C. Section 107, the material on this site is distributed for research and educational purposes only. If you wish to use this material for purposes that go beyond 'fair use', you must obtain permission from the copyright owner. Such material is credited to the true owner or licensee. We will remove from the forum any such material upon the request of the owners of the copyright of said material, as we claim no credit for such material.
Privacy Policy: Australian Property Forum uses third party advertising companies to serve ads when you visit our site. These third party advertising companies may collect and use information about your visits to Australian Property Forum as well as other web sites in order to provide advertisements about goods and services of interest to you. If you would like more information about this practice and to know your choices about not having this information used by these companies, click here: Google Advertising Privacy FAQ
Australian Property Forum is hosted by Zetaboards. Please refer also to the Zetaboards Privacy Policy
