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Housing bubble talk is alarmist says RBA, house prices have risen at similar rate to incomes; Reserve Bank assistant governor Malcolm Edey hoses down threat of house price bubble
Topic Started: 18 Sep 2013, 03:50 PM (2,076 Views)
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Housing bubble talk ‘alarmist’: RBA

Reserve Bank of Australia assistant governor Malcolm Edey has hosed down the threat of a house price bubble, branding concerns that record low interest rates will fuel an unsustainable property boom as “alarmist”.

“There is no doubt [house prices have risen] but we have to keep in perspective. House prices have risen at a rate similar or level to growth in household income,” he said.

“The ratio has been roughly flat or tending actually to fall. Within that trend there will be cycles and periods where that ratio rises or falls or the rate has been higher than average or lower than average,” Dr Edey told a financial services conference in Sydney on Wednesday.

“But we shouldn’t be rushing to reach for the bubble terminology every time house prices are above average because you will be unrealistically alarmist,” he said.

“This is a low rate environment and one of the effects it that it stimulates demand and housing. We are seeing that influence in the housing sector and that’s not surprising because its an interest rate sensitive sector,” he said.

Dr Edey pointed to Reserve Bank comments in its most recent meeting minutes that addressed rising house prices.

“We said then – indicated this is an area to watch but we do need to keep it into perspective,” he said.

Read more: http://www.afr.com/p/national/housing_bubble_talk_alarmist_rba_aADFgM69roIVJyNbv9FqFL
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fwiw I honestly believe CJ is on the money with this one.
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It is no longer alarmist to talk of a housing bubble. The RBA should either admit there is an issue with house prices or else say nothing about it.

Edey’s point about prices growing with disposable household incomes is irrelevant. Current asset prices reflect expected future cash flows discounted at a discount rate. What matters, in determining a housing bubble, is whether expectations of future household disposable incomes are realistic.

Edey knows, Treasury knows that future household disposable incomes will not grow at the same rate that they grew at between 1998 and 2007 (roughly). 1. Because the budget will not be in a position to add to disposable household incomes (through tax cuts and transfers) and 2. Because there will no longer be same income effect previously caused by the ToT.

But do households know this? Have they factored into their current spending and saving decisions that their future incomes may not grow at the same rate as they have in the past? Because if they haven’t and if house prices are growing because of a false perception of future income growth, then there is a bubble in housing – full stop. There is a fair bit of evidence that some households have revised down their expectations of future income growth, however the ones with the debt have not. That is a very unstable situation. The RBA should be stressing that future household income growth is likely to be slower than it was – because clearly not all households get it (i.e. the ones who love borrowing). I thought that was the message Stevens was trying to get across. Maybe Edey is off message.
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Stick to the facts in property market

September 19, 2013
Adele Ferguson

It seems the world is hitting the panic button that a property bubble is forming that if left to its own devices could wreak devastation on an already fragile global economy.

In Australia the regulators are making headlines with warnings to the banks not to be lax with their lending requirements, along with comments in The Australian Financial Review by former Reserve Bank board member Bob Gregory that a property bubble ''just seems to be inevitable''.

It is a similar story in Britain with the Bank of England planning to meet as pressure mounts on it to look at what it can do to prevent a housing bubble emerging, and in China, where property prices have been soaring, the Chinese government is clamping down on speculative and investment driven property demand.

Such warnings are necessary in some countries, but Australia isn't there yet and when a few pertinent statistics are put into context then talk of a bubble starts to look sensationalist.

It prompted the Reserve Bank's assistant governor Malcolm Edey to step in and say such talk of bubbles in Australia was "alarmist". He said looking back over the past decade, house prices have risen at a rate "equivalent to or on average less than the growth of household incomes".

While it is true Australia has always been accused of having relatively high residential prices compared with the rest of the world, it is like comparing apples with oranges.

IBISWorld's Phil Ruthven put it well recently when he pointed out that 63 per cent of the nation's household assets, namely property, equipment and household durables, totals $8.4 trillion, and 12 per cent of our income goes to servicing the debt of $1.66 trillion (92 per cent of which is property mortgages). This is equivalent to a gearing of 20 per cent, which would be considered low if we were analysing a company.

It looks even less worrying when some of the statistics compiled by the country's biggest bank, Commonwealth Bank, are digested. In its annual results presentation it says mortgagee in possession represents 8 basis points of its portfolio balances, limited low doc lending is limited to 1.9 per cent of its total portfolio with stringent lending criteria and 80 per cent of customers pay in advance of their required monthly mortgage repayment.

In terms of debt servicing, figures compiled by Goldman Sachs indicate that in 2008, 13 per cent of household income was allocated to servicing mortgages, compared with less than 8 per cent in 2013.

It seems the property bubble that is worrying a number of commentators in Australia is largely isolated to Sydney and Perth's metropolitan areas. It is there that auction clearance rates have been hitting 80 per cent for most of the year, while in Melbourne they recently hit 75 per cent.

If this ends up in a property boom due to low interest rates, then that isn't a bad thing if the debt can be serviced. Indeed, if it spills over into new housing starts, it will help the building and construction sector, which has recently seen a spike in company collapses at the small end of the market.

Figures from the ABS show that the weighted average established house prices across eight capital cities rose 2.4 per cent between the March 2013 and June 2013 quarters and 5.1 per cent between June 2012 and June 2013. In Sydney weighted average house prices rose 2.7 per cent in the quarter, compared with 2.4 per cent for Melbourne, 1.9 per cent for Brisbane, 0.3 per cent for Adelaide and 3.4 per cent for Perth.

But it is the forecasts that are making people nervous. SQM Research predicts "significant" price rises for Sydney of between 15 to 20 per cent.

Read more: http://www.smh.com.au/business/stick-to-the-facts-in-property-market-20130918-2tzp5.html
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RBA deflates talk of housing bubble

September 19, 2013
Clancy Yeates

The Reserve Bank has moved to dampen fears of a dangerous run-up in house prices fuelled by cheap debt, dismissing talk of a housing bubble as ''unrealistically alarmist''.

With house price growth at a three-year high and mortgage lending picking up, authorities are on alert over the risks that could arise from any lapse in lending standards.

But the Reserve's assistant governor responsible for financial stability, Malcolm Edey, on Wednesday played down suggestions a bubble was forming, saying prices had moved in line with people's incomes over the past decade.

The chairman of the Australian Prudential Regulation Authority, John Laker, also signalled it would only consider imposing tougher credit rules on banks after it had engaged more closely with the sector over its lending practices.

Dr Edey said there was ''no doubt'' demand for housing was rising, but it was critical to keep the trend in perspective.

''Looking back over the last 10 years or so, house prices have risen at a rate equivalent to or on average less than the growth of household incomes,'' Dr Edey said at a Financial Services Institute of Australasia conference in Sydney.

The percentage of disposable income that households have tied up in housing has fallen slightly over the past 10 years, figures from the central bank show.

Dr Edey said there had been periods when prices had risen more quickly than incomes over the decade, but that did not equal a ''bubble''.

''We're in one of the higher-than-average periods at the moment, but we shouldn't be rushing to reach for the bubble terminology every time the rate of increase in house prices is higher than average, because by definition that's 50 per cent of the time,'' he said.

''You're just going to be unrealistically alarmist by making that call every time that happens.''

Latest figures from RP Data-Rismark show that capital city home prices rose 4 per cent in the three months to August, the strongest growth since April 2010. Housing credit growth has also picked up from record lows, driven mainly by investors.

But the drop in the cash rate to a record low of 2.5 per cent and boom-time auction clearance rates in Sydney have sparked some predictions of a looming surge in house prices.

Read more: http://www.smh.com.au/business/rba-deflates-talk-of-housing-bubble-20130918-2tzp7.html
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Bernanke: There's No Housing Bubble to Go Bust (2005)

Thursday, October 27, 2005

Ben S. Bernanke does not think the national housing boom is a bubble that is about to burst, he indicated to Congress last week, just a few days before President Bush nominated him to become the next chairman of the Federal Reserve.

U.S. house prices have risen by nearly 25 percent over the past two years, noted Bernanke, currently chairman of the president's Council of Economic Advisers, in testimony to Congress's Joint Economic Committee. But these increases, he said, "largely reflect strong economic fundamentals," such as strong growth in jobs, incomes and the number of new households.

Bernanke's thinking on the housing market did not attract much attention before Bush tapped him for the Fed job Monday but will likely be among the key topics explored by members of the Senate Banking Committee during upcoming hearings on his nomination.

Many economists argue that house prices have risen too far too fast in many markets, forming a bubble that could rapidly collapse and trigger an economic downturn, as overinflated stock prices did at the turn of the century. Some analysts have warned that even a flattening of house prices might cause a slump -- posing the first serious challenge to whoever succeeds Fed Chairman Alan Greenspan after he steps down Jan. 31.

Bernanke's testimony suggests that he does not share such concerns, and that he believes the economy could weather a housing slowdown.

"House prices are unlikely to continue rising at current rates," said Bernanke, who served on the Fed board from 2002 until June. However, he added, "a moderate cooling in the housing market, should one occur, would not be inconsistent with the economy continuing to grow at or near its potential next year."

Greenspan has said recently that he sees no national bubble in home prices, but rather "froth" in some local markets. Prices may fall in some areas, he indicated. And he warned in a speech last month that some borrowers and lenders may suffer "significant losses" if cooling house prices make it difficult to repay new types of riskier home loans -- such as interest-only adjustable-rate mortgages.

Bernanke did not address the possibility of local housing bubbles or the risks faced by individual borrowers or lenders in a slowing market.

But if Bernanke is confirmed as Fed chief, and if the housing market slows more than he expects, he would be unlikely to use the central bank's power over short-term interest rates to prop up falling housing prices for the sake of individual homeowners, according to comments he has made in numerous speeches and statements in academic papers.

Rather, he has argued for many years that the Fed should respond to rising or falling prices for stocks, real estate or other assets only if they are affecting inflation or economic growth in an undesirable way. Thus, he would advocate cutting interest rates if a reversal in the housing market sharply dampened consumer spending, triggering job losses or a fall in inflation to very low levels.

Lower interest rates encourage consumers and businesses to borrow and spend, spurring economic growth and hiring. That would also make it less likely that very low inflation could turn into deflation, an economically harmful drop in the overall price level.

Bernanke believes "the Fed's job is to protect the economy, not to protect individual asset prices," said William Dudley, chief economist for Goldman Sachs U.S. Economics Research.

That view mirrors Greenspan's. He and Bernanke have both said it is unrealistic to expect the Fed to identify a bubble in stock or real estate prices as it is inflating, or to be able to pop it without hurting the economy. Instead, the Fed should stand ready to mop up the economic aftermath of a bubble.

Greenspan, for example, has rejected suggestions that the Fed should have raised interest rates in the late 1990s sooner or higher to slow soaring stock prices. He says the Fed got it right after that boom by cutting its benchmark rate deeply in 2001, in response to falling stock prices, the recession and the Sept. 11 terrorist attacks.

After Bernanke joined the Fed board in 2002, as the economic recovery remained sluggish and job cuts continued, he vocally supported Greenspan's strategy of lowering the benchmark rate further and holding it very low until mid-2004, when it was clear that both job growth and the economic expansion were solid.

Bernanke also warned in a November 2002 speech that the Fed would act aggressively to prevent deflation, which had devastated the economy during the Great Depression that followed the 1929 stock market crash.

A former chairman of Princeton University's economics department, Bernanke earned academic renown for his research on the Fed's role in causing the Depression.

After the 1929 crash, the Fed mistakenly raised interest rates to protect the value of the dollar, which was then pegged to the price of gold, Bernanke wrote in an October 2000 article in Foreign Policy. The higher rates contributed to surging unemployment and severe price deflation. The Fed then made things worse by not acting to counter the credit crunch that resulted from the collapse of the banking system in the early 1930s.

"Without these policy blunders by the Federal Reserve, there is little reason to believe that the 1929 crash would have been followed by more than a moderate dip in U.S. economic activity," Bernanke wrote.

In late 2000, looking ahead to the possibility of a sharp fall in then-lofty stock prices, Bernanke concluded, "history proves . . . that a smart central bank can protect the economy and the financial sector from the nastier side effects of a stock market collapse."

And in words that might come to mind if housing tanks, he said the economic effects of falling asset prices "depend less on the severity of the crash itself than on the response of economic policymakers, particularly central bankers."

Read more: http://www.washingtonpost.com/wp-dyn/content/article/2005/10/26/AR2005102602255.html
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1. I've asked several times for a property spruiker to define a bubble. To date, none have.

2. Yesterday it was the RBA assistant governor claiming talk of bubbles is alarmist and now this article.

I'd like any of these people to define a bubble. If you can't define a bubble, you can't claim not to be in one.

3. Hyman Minsky defined a financial instability hypothesis which defines the three types of borrowers that contribute to the accumulation of insolvent debt: hedge borrowers, speculative borrowers, and Ponzi borrowers.

Even though Minsky's theory has little influence, it is the best theory I've read the explains peak debt, which is one of the causes of the GFC.

4. Every property spruiker claims the shortage of properties will underpin values but they ignore the financials, as a shortage of $ and the higher cost of them would be undermine the foundations of their claim. That is one of the reasons many central banks are printing money and why we have historically low interest rates.

5. Rates can't stay low forever. Anyone who boards the low rate express last or is highly leveraged will have a problem when interest rates rise. How low will rates go and for how long?

That's why the RBA are warning banks not to relax lending standards to chase credit growth.

6. The US Federal Reserve Bank and RBA didn't see the GFC coming.

7. The A$ is rising against the US$. A strong A$ will keep a lid on our stock market as it impacts foreign earnings, as it's done since the GFC hit. We didn't have a recession but our market is still way below peak. That claim can't be made for property.
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Should we fear a housing bubble in Australia? (video)

Residex founder, John Edwards appeared on Switzer TV to discuss his views on a whether or not a housing bubble is looming, and to look at how the housing market is faring around the country.

See the interview here…

http://blog.residex.com.au/2013/09/19/should-we-fear-a-housing-bubble-in-australia/
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Facts!
19 Sep 2013, 03:35 PM
1. I've asked several times for a property spruiker to define a bubble. To date, none have.

2. Yesterday it was the RBA assistant governor claiming talk of bubbles is alarmist and now this article.

I'd like any of these people to define a bubble. If you can't define a bubble, you can't claim not to be in one.

3. Hyman Minsky defined a financial instability hypothesis which defines the three types of borrowers that contribute to the accumulation of insolvent debt: hedge borrowers, speculative borrowers, and Ponzi borrowers.

Even though Minsky's theory has little influence, it is the best theory I've read the explains peak debt, which is one of the causes of the GFC.

4. Every property spruiker claims the shortage of properties will underpin values but they ignore the financials, as a shortage of $ and the higher cost of them would be undermine the foundations of their claim. That is one of the reasons many central banks are printing money and why we have historically low interest rates.

5. Rates can't stay low forever. Anyone who boards the low rate express last or is highly leveraged will have a problem when interest rates rise. How low will rates go and for how long?

That's why the RBA are warning banks not to relax lending standards to chase credit growth.

6. The US Federal Reserve Bank and RBA didn't see the GFC coming.

7. The A$ is rising against the US$. A strong A$ will keep a lid on our stock market as it impacts foreign earnings, as it's done since the GFC hit. We didn't have a recession but our market is still way below peak. That claim can't be made for property.
A bubble is really easy to define.

A bubble reflects an asset or item where the "factors of production" are making excess returns.

The factors of production are labour and capital.

In Australia, listed property developers make a very low returns on capital and wages have grown in line with most other industries. Ergo, no Bubble.

In the USA / Spain / Ireland / UK, the listed and unlisted developers were making huge returns on capital. Ergo, bubble.

In The USA tech boom, the factors of production (labour) were making huge gains. Again bubble.

In the Tulip craze, anyone planting tulip seeds were making a huge return on labour and capital.

There is an old saying which goes like this...
"the best cure for high prices is high prices".

This is another way of saying if prices are too high, capital and labour are attracted to the excess returns and new supply will solve the problem. Real estate is no different.

(S – I) + (T - G) + (M - X) = 0
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Facts!
19 Sep 2013, 03:35 PM
1. I've asked several times for a property spruiker to define a bubble. To date, none have.
I don't know why you confine your question to spruikers but you now have a very precise answer (which makes sense to me) in post #9 courtesy of b_b. Would you care to comment?

b-b's concept fits nicely with the soap bubble analogy which implies that bubbles burst. When prices grossly exceed the factors of production, then a supply response (available to anyone) will burst the bubble. If Australia's houses were in a bubble then surely it would be open to anyone to burst it buy supplying at lower prices and become a billionaire. Why not? If you take the view that Australia's house prices are overvalued then go ahead and supply a million or two at the lower prices you believe to be more appropriate. You'll be rich.
Housing costs to Income broadly unchanged since 1994 - re-ratified here
The People of Australia have the highest median wealth in the World
2002-2012 10 year house price growth the SLOWEST since 1952-1962
"There are two kinds of people in this world: ones that fiddle around wondering whether a thing's right or wrong and guys like us." (Hugo to Gagin in Ride the Pink Horse)
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