Australian Housing: Financial Regulators look on Dazed and Confused

australian home with banknotes
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Before getting into today’s Daily Reckoning, a quick announcement. If you haven’t already seen my mate Kris Sayce’s controversial presentation, you can do so here.

He makes the case that the government is coming for your super. You don’t need any more proof that this is what will happen than an official denial. And this is exactly what you got from Treasurer Joe Hockey recently.

The Greens presented (for them at least) a fairly decent proposal on superannuation reform last week. But Hockey rejected it out of hand. In doing so, he confirmed the government’s commitment not to change superannuation policy in ‘this term of government’.

That’s not exactly reassuring. Hockey is joined at the hip with Abbott, and Abbott is fighting a losing battle to remain as leader. It’s just a matter of time until he goes. When he does, Hockey will go down with him.

Whatever happens in the short term, you can bet that in the years ahead your super account will be used and abused by government in some way or another. Kris is all over it. If you’re interested in this crucial topic, check out what he has to say here.

Well. Here we are on the first Tuesday of the month. It’s national interest rate decision day…again. The market says that chief deflation buster — Reserve Bank of Australia boss Glenn Stevens — will cut interest rates again to another record low of 2%.

While this would have a negligible impact on the longer term health of the economy, it would continue to fire up the Sydney property market.

This property boom that ‘Australia’ is having is more and more confined to Sydney alone, with a little help from Melbourne. That’s not meant to provide comfort. It doesn’t mean the boom is ‘contained’.

Rather, I would argue that this is the final, insane, blow-off top surge in the nation’s core property markets. In the same way that a select number of large and popular stocks go ‘parabolic’ in the final stages of a stock market bubble, so too Sydney’s (and to a lesser extent Melbourne’s) housing market has completely lost touch with fundamentals.

Chris Joye, writing at The Financial Review, explains this nicely in a recent article:

Over the three months to 27 February, 2015, national prices climbed 2.5 per cent, which represents annualised capital gains of 10.5 per cent. That’s more than four times wages growth, which is running at 2.5 per cent.

Dwelling values in Sydney and Melbourne have appreciated at a 12.0 per cent and 18.4 per cent annualised rate, respectively, over the last quarter (and by 13.7 per cent and 7.3 per cent, respectively, over the past 12 months).

According to the RBA’s data, housing credit growth is also rising at 2.8 times the rate of wages, which is pushing Australia’s housing debt-to-income ratio, which was already at an all-time peak of 139 per cent in September, further into unchartered territory.

Finally, one of the RBA’s preferred valuation benchmarks, the national house price-to-income ratio, is on my analysis now above its preceding high water-mark touched in 2007 and again in 2010. After both these episodes, home values fell by 6 per cent to 8 per cent.

As Joye points out, Victoria and NSW represent 60% of Australia’s population. Add in Queensland and you get 78%. The east coast property boom has the potential to be hugely destabilising in the years ahead.

And you’ll have the RBA and APRA, the financial regulator, to blame for it. The RBA continues to reduce rates while showing ‘concern’ about rising house prices and passing the buck to APRA.

Meanwhile, APRA looks on, dazed and confused. It talks about setting 10% limits on investor mortgage growth at the banks, yet does nothing about it. Our regulators are a joke.

But when everyone is rolling in it, those warning about the risks to financial instability are marginalised. With Australian house prices going off in the major capitals and remaining firm or holding up at least in the other capital cities, no one wants the party to end.

And yesterday, the ASX 200 got close to the 6,000 point level before pulling back a bit. Asset prices are going up as our economy goes down! Yay!

Welcome to 21st century finance, dear reader. Are you enjoying the spectacle?

While the Australian stock market has partied hard over the past few months as the RBA pours tequila shots down everyone’s throat, keep in mind we are due for a correction of some sort.

Since mid January, you’ve seen the ASX 200 surge nearly 700 points. That’s an incredible rise of around 13% in less than 2 months. In the next few weeks, you would expect the market to give some of that back as profit takers move in.

If the RBA decides to hold off on another rate cut today, that could be a signal to take short term profits. If it does hold off, look at it as merely a short break while it refills the tequila bottle. Another cut is coming, and just about everyone knows it…stock market investors, property speculators…and sadly, the nation’s dwindling number of savers.

A pause here would be kind of embarrassing for the bank. What would they hope to achieve by it? The only thing that will stop the property speculators right now (apart from an interest rate hike) is firm macroprudential controls by APRA.

And based on what you’ve seen from them so far — that is, nothing — I’m not holding my breath.

Congratulations, Australia!

Greg Canavan,
for The Daily Reckoning Australia

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Greg Canavan
Greg Canavan is the Managing Editor of The Daily Reckoning and is the foremost authority for retail investors on value investing in Australia. He is a former head of Australasian Research for an Australian asset-management group and has been a regular guest on CNBC, Sky Business’s The Perrett Report and Lateline Business. Greg is also the editor of Crisis & Opportunity, an investment publication designed to help investors profit from companies and stocks that are undervalued on the market. To follow Greg's financial world view more closely you can subscribe to The Daily Reckoning for free here. If you’re already a Daily Reckoning subscriber, then we recommend you also join him on Google+. It's where he shares investment research, commentary and ideas that he can't always fit into his regular Daily Reckoning emails. For more on Greg go here.
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