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RBA enormously worried about Australian house price surge, but won't admit it; House prices are popping, Sydney is going berserk
Topic Started: 26 Sep 2013, 05:04 PM (8,089 Views)
b_b
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Massive
27 Sep 2013, 02:35 PM
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27 Sep 2013, 02:03 PM
There are vast tracts of land suitable for property on the periphery but that is some 60 km from the CBD. If that land is to be available affordable, and be attractive for occupiers, then we need massive investment in roads, trains, schools etc – i.e. all the things that make them attractive places to live.
yep... typically in a boom time you would expect these things to be built (and subsidized) because of the excess wealth lying about.

instead in this boom cycle it all went into existing , developed areas... some rezoning / infill , some beautifying, some refurbishment, and a whole truckload of speculation on values..

so now we have hit slowdown, where significant proportion of the wealth of last boom was invested in wrong areas, leaving less capital to try make up
the difference at higher costs. (edit: not saying capital is not available , just that those who have access to it are not going to use it in these areas.. they want to invest in another inner city apartment or whatever and see no gain in new housing )

brave new industries and investments should be springing up all over the place now - increasing interest in outer areas. but the (willing) capital and infrastructure to do so is currently not there.


Yes - that seems to be the narrative. Low interest rates are not working because buyers are buying existing houses and not new developments.

However, buying existing stock is exactly what we need, so the new developments can stack-up. So low interest rates are working.

And hey presto, here comes the supply....

http://www.propertyobserver.com.au/news/sept-25-news-plus-stockland-s-largest-ever-residential-development-launched/2013092465264

Edited by b_b, 27 Sep 2013, 02:49 PM.
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Massive
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b_b
27 Sep 2013, 02:45 PM
good to see ..

need to see a lot more of these coming online for every major city .. ( and people able to buy in )
Edited by Massive, 27 Sep 2013, 03:21 PM.
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Sweetdish
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27 Sep 2013, 02:03 PM
The problem for the RBA is that Australia is not one property market and each market has different characteristics. Broadly applied macroprudential controls could certainly help manage values in Sydney, but may damage other markets which are not seeing these sorts of price increases. If the Sydney market is the focus then you need to fix the structural problems. There are vast tracts of land suitable for property on the periphery but that is some 60 km from the CBD. If that land is to be available affordable, and be attractive for occupiers, then we need massive investment in roads, trains, schools etc – i.e. all the things that make them attractive places to live. Otherwise people will continue to compete for more expensive property closer to the CBD, and drive values ever-higher. A country-wide government with vision should consider substantial initiatives for decentralisation along the lines commenced by the Whitlam government in the 70s with their “Growth Centres” strategy.
This is true. Its a very tricky situation.
If they raise interest rates to stop the Sydney bubble from forming/growing then the rest of the country and the retail industry in particular will not grow or may even shrink.
If they do keep interests this low there is a real risk that the property market goes up too fast causing a bubble to pop. A crashing housing bubble in Australia would have enormous negative effects on the economy and thats why they are scared. I would go as far as to say that following the mining boom, increasing housing values is pretty much the only thing Australia is producing and the only reason the Aussie economy is ticking along nicely. We are even exporting imaginary house prices to cashed up Chinese investors which sofar seems to be working. But besides house prices we really have very little to offer in terms of export. Aussies are incapable of good manufacturing due to a lack of decent engineers and a very high cost of doing business. And with the Coalition's 1995 version of the NBN there is no chance in hell we can grow and nurture a world leading IT industry like Sweden for example.

Those house prices better keep on rising or we are fucked. Properly fucked. It would be much much worse than Ireland where there is at least some kind of industry to fall back on.
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Veritas
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b_b
27 Sep 2013, 02:45 PM
Yes - that seems to be the narrative. Low interest rates are not working because buyers are buying existing houses and not new developments.

However, buying existing stock is exactly what we need, so the new developments can stack-up. So low interest rates are working.

And hey presto, here comes the supply....

http://www.propertyobserver.com.au/news/sept-25-news-plus-stockland-s-largest-ever-residential-development-launched/2013092465264
What fresh madness is this?

You are comfortable with the sole instrument of housing policy in this country to be interest rates.

And the recipe for success is cheap money to increase the price of the houses we already have, not least through specualtive demand so that it becomes attractive to build new and relatively cheaper stock at the periphery.

Does it not matter that we already have huge household debt levels and that our housing is already really expensive?

What about structural supply side reform.

I really think we are through the looking glass now.

Ireland 2006.
Property acquisition as a topic was almost a national obsession. You couldn't even call it speculation as the buyers all presumed the price of property could only go up. That’s why we use the word obsession. Ordinary people were buying properties for their young children who had not even left school assuming they would not be able to afford property of their own when they left college- Klaus Regling on Ireland. Sound familiar?

The evidence of nearly 40 cycles in house prices for 17 OECD economies since 1970 shows that real house prices typically give up about 70 per cent of their rise in the subsequent fall, and that these falls occur slowly.
Morgan Kelly:On the Likely Extent of Falls in Irish House Prices, 2007
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Admin
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RBA dilemma: strong dollar v bubble risk

September 27, 2013 - 2:33PM
Glenda Kwek

Finding a balance between pushing for a lower Australian dollar while avoiding an overheating of the housing market is what will dominate the Reserve Bank board’s agenda at its meeting next week, economists say.

With a majority of economists and the market expect the central bank to keep the cash rate at its historic low of 2.5 per cent, the statement released after the board meeting will be closely watched for any indication on where the RBA stands on the recent strength in the currency, and of the recovery in the property sector.

The Reserve Bank has repeatedly said a lower currency would help Australia’s economy as it transitions away from mining-led growth. But its recent easing cycle, which was meant to stimulate non-resource sectors, has sparked strong growth in the housing market that could led to a bubble, analysts said.

“With the RBA characterising the degree of policy stimulus provided to the economy as ‘substantial’, would it be prepared to return to a dovish stance on the off chance that this would further deflate the currency?” Citi economists Paul Brennan and Josh Williamson wrote in a research note today.

"Such an outcome is highly unlikely, when doing so would arguably have better success in further fuelling the fire under the property market."

The booming housing market has seen capital city house prices rise 4 per cent in the three months to August, the largest growth since April 2010, while forecasts for next year and more bullish.

The rapid growth has been driven in part by investment properties, and Commonwealth Bank economists said the RBA would want to avoid too much property speculation by lowering rates again next week.

“While this is part of the plan to rebalance growth, as mining investment slows down, the RBA would not want to see housing prices or new lending rise too rapidly," HSBC's economists Paul Bloxham and Adam Richardson said.

“We expect the RBA to hold steady as worries about the high currency, which could have motivated a cut, are traded off against risks of over-inflating the housing market.”

Read more: http://www.smh.com.au/business/the-economy/rba-dilemma-strong-dollar-v-bubble-risk-20130927-2uiur.html
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Shadow
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Veritas
27 Sep 2013, 04:43 PM
I really think we are through the looking glass now.

Ireland 2006.
2006 was pretty much the peak of the Irish bubble and construction boom.

Don't forget we haven't even had a construction boom or bubble yet in Australia.

The construction boom only really kicked off in Sydney last year, but it's still in its early stages and hasn't spread to the rest of the country yet.

So Australia now is probably more like Ireland in 1999-2000. There's a long way still to run.
Edited by Shadow, 27 Sep 2013, 04:59 PM.
1. Epic Fail! Steve Keen's Bad Calls and Predictions.
2. Residential property loans regulated by NCCP Act. Banks can't margin call unless borrower defaults.
3. Housing is second highest taxed sector of Australian Economy. Renters subsidised by highly taxed homeowners.
4. Ongoing improvement in housing affordability. Australian household formation faster than population growth since 1960s.
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Veritas
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Shadow
27 Sep 2013, 04:56 PM
2006 was pretty much the peak of the Irish bubble and construction boom.

Don't forget we haven't even had a construction boom or bubble yet in Australia.

The construction boom only really kicked off in Sydney last year, but it's still in its early stages and hasn't spread to the rest of the country yet.

So Australia now is probably more like Ireland in 1999-2000. There's a long way still to run.
We don't need the building boom and supply overhang.

Ireland was already well into bubble territory before the overbuilding began.

Quote:
 
Basic economics tells us that policies that restrict housing supply steepens the supply curve, which makes house prices far more sensitive to changes in demand and increases the likelihood of the housing market experiencing boom/bust price cycles as demand rises/falls.

This is a topic that I have written about many times before, for example here and here. It is also a view supported by research. For example, a recent Journal of Urban Economics paper by Haifang Huanga and Yao Tang suggests the link between higher house price volatility and non-responsive housing supply (e.g. due to restrictive land use regulations) has become more pronounced in the US [my emphasis]:


http://www.macrobusiness.com.au/2013/09/misreading-housing-bubble-dynamics/
Property acquisition as a topic was almost a national obsession. You couldn't even call it speculation as the buyers all presumed the price of property could only go up. That’s why we use the word obsession. Ordinary people were buying properties for their young children who had not even left school assuming they would not be able to afford property of their own when they left college- Klaus Regling on Ireland. Sound familiar?

The evidence of nearly 40 cycles in house prices for 17 OECD economies since 1970 shows that real house prices typically give up about 70 per cent of their rise in the subsequent fall, and that these falls occur slowly.
Morgan Kelly:On the Likely Extent of Falls in Irish House Prices, 2007
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Shadow
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Veritas
27 Sep 2013, 05:16 PM
We don't need the building boom and supply overhang.

Ireland was already well into bubble territory before the overbuilding began.
Not sure how those statements are relevant? You originally said Australia now is like Ireland in 2006. I pointed out that Ireland in 2006 was at the peak of a massive construction boom and bubble, and that Australia today is more like Ireland in 1999-2000, because we haven't had a huge construction or bubble yet. By 2006, Irish house prices had been growing massively faster than incomes for a decade, whereas in Australia today, house prices have simply tracked incomes for the past decade.

And as for quoiting Macrobusiness... do you still not realise they've been wrong about house prices, wrong about unemployment, wrong about GDP, wrong about the commodities boom, wrong about China, wrong about iron ore prices, wrong about pretty much everything. I'm struggling to think of anything they've been right about. I know you feel compelled to quote them since you pay for their financial advice, but they're just a pack of cowboys who churn out doom & gloom predictions that never eventuate.
Edited by Shadow, 27 Sep 2013, 05:24 PM.
1. Epic Fail! Steve Keen's Bad Calls and Predictions.
2. Residential property loans regulated by NCCP Act. Banks can't margin call unless borrower defaults.
3. Housing is second highest taxed sector of Australian Economy. Renters subsidised by highly taxed homeowners.
4. Ongoing improvement in housing affordability. Australian household formation faster than population growth since 1960s.
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Veritas
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Shadow
27 Sep 2013, 05:23 PM
Not sure how those statements are relevant? You originally said Australia now is like Ireland in 2006. I pointed out that Ireland in 2006 was at the peak of a massive construction boom and bubble, and that Australia today is more like Ireland in 1999-2000, because we haven't had a huge construction or bubble yet. By 2006, Irish house prices had been growing massively faster than incomes for a decade, whereas in Australia today, house prices have simply tracked incomes for the past decade.

And as for quoiting Macrobusiness... do you still not realise they've been wrong about house prices, wrong about unemployment, wrong about GDP, wrong about the commodities boom, wrong about China, wrong about iron ore prices, wrong about pretty much everything. I'm struggling to think of anything they've been right about. I know you feel compelled to quote them since you pay for their financial advice, but they're just a pack of cowboys who churn out doom & gloom predictions that never eventuate.
The relevance is the similarly precarious position Australia finds itself in relation to its housing and financial system in my view.

As for your hate rant on macrobusiness, well I prefer to evaluate the arguments based on their own individual merit.

Perhaps you might do the same.

The point being made by LVO in this case, is that inelastic supply exacerbates rather than ameliorates the potential for boom/ bust cycles.
Property acquisition as a topic was almost a national obsession. You couldn't even call it speculation as the buyers all presumed the price of property could only go up. That’s why we use the word obsession. Ordinary people were buying properties for their young children who had not even left school assuming they would not be able to afford property of their own when they left college- Klaus Regling on Ireland. Sound familiar?

The evidence of nearly 40 cycles in house prices for 17 OECD economies since 1970 shows that real house prices typically give up about 70 per cent of their rise in the subsequent fall, and that these falls occur slowly.
Morgan Kelly:On the Likely Extent of Falls in Irish House Prices, 2007
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miw
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Veritas
27 Sep 2013, 05:29 PM
The point being made by LVO in this case, is that inelastic supply exacerbates rather than ameliorates the potential for boom/ bust cycles.
Which may have been a revelation for you, but ..... um.. derp. Most of us have been aware of this since we first spent 30 seconds thinking about it.

But it is irrelevant. As Shadow pointed out, Ireland in 2006 was at the end of a massive overconstruction binge and a near-decade-long price boom. Sydney is 12 months out of a decade-long construction downturn and price stagnation. To compare it with Ireland 2006 is asinine.

Note that Shadow didn't say a bubble and bust could not eventuate. He just pointed out that there's a lot of water needs to flow under the bridge before we can get there. And he's right.
The truth will set you free. But first, it will piss you off.
--Gloria Steinem
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