Australian Housing Speculation And Financial Stability

Inflation_Deflation_lge
Reddit

Australian stocks are set for a weak day today after poor economic data in the US saw the Dow fall by nearly 300 points overnight. Durable goods orders fell 1.4% month on month in February, casting doubt on the strength of the US economy.

It’s only one month though, and one data point, so nothing to get too carried away with. And the Dow is still near record highs and remains in a strong uptrend.

Closer to home, the ASX 200 is struggling with the 6,000 point barrier. It’s made a couple of attempts to breach this level lately with no success. Funnily enough, back in 2008 it was also an area of resistance.

As you can see in the chart below, after the market’s initial plunge lower from the 2007 peak, it rallied from 5,000 points to right on 6,000. From that point it turned back down. Seven years later, and here we are knocking on 6,000 points again.

It will take a few attempts to get there, but if the RBA keeps up with its easy money mantra and politicians and regulators stand around twiddling their thumbs, it’s bound to break higher at some point.

That’s because the market knows the current policy and regulatory regime encourages and rewards speculation, while only issuing the odd caution to look partially like a responsible adult.

Which brings me to yesterday’s news…

Sometimes you just have to wonder. Maybe someone really is having a great big laugh and the joke is on us. That’s certainly the way I felt when the RBA released its quarterly ‘Financial Stability Review’ yesterday and I saw the resulting headlines in the mainstream media soon afterwards…

‘Reserve Bank sounds warning on house prices’, said Business Day.

The Financial Review went with ‘RBA sounds alarm on property speculators’

The Australian opted for ‘Property risks increasing: RBA’.

All these news outlets duly reported how ‘concerned’ the RBA was about the effect on financial stability from fast rising house prices.

But not one of them took the RBA to task for causing the increase in risks in the first place! It’s hilarious.

Let’s just get this straight. The RBA cuts interest rates with the express intention of creating a housing boom to offset the decline in mining investment. And then when that policy starts to ‘work’, the same institution issues a document that ‘warns’ about the destabilising effect house price speculation, which is precisely what they intended to happen by lowering interest rates.

The logic is seriously mind-boggling.

Here’s what happens, in the RBA’s own words, when you cut interest rates deeply:

‘Investor housing loan approvals in New South Wales have increased by almost 150 per cent over the past three years, and now account for almost half the value of all housing loan approvals in that state. They have also increased quite strongly in Victoria over the same period. At the national level, growth in investor housing credit has continued to increase over recent months, to now be around 10 1⁄2 per cent in six-month-ended annualised terms.’

But don’t worry, bank regulator APRA is on the case. The RBA thinks it’s still too early to see APRA’s measures show up in the numbers.

It is too early to expect a material slowing in investor loan approvals or credit growth in response to APRA’s measures, partly because of the pipeline of pre-approvals already agreed before the measures were announced.

Errr…what exactly are these APRA ‘measures’ referred to by the RBA? This is where the joke gets even funnier. The RBA is referring to a letter sent by APRA to the banks in December, telling them to go easy on the lending or they would do something about it. No doubt, the banks roundly ignored this letter and continued to throw money at investors to throw money at dilapidated Sydney property.

But the source of the speculation is not the ‘property’…it’s the land. This is something Phil Anderson at Cycles, Trends and Forecasts has been on about for ages. And he thinks its only going to get better (or worse, depending on your perspective).

Melbourne had its land boom and bust in the 1880s and 1890s. Now it’s Sydney’s turn. Sydneysiders, you might want to dust off the history books to see how that one turned out.

The RBA is probably the only one waiting for the effect of APRA’s ‘measures’ to flow through. Meanwhile, they’ll continue to feed the market sugar and then warn it about the risks of getting diabetes.

While not much of a consolation, at least the RBA understands the big picture risks of letting a housing bubble get out of hand, even if they don’t intend to do anything about it.

…the main risk from the ongoing strong level of investor activity is most likely to be macroeconomic in nature. Heightened investor demand can amplify the housing price cycle, especially when it involves the use of leverage, and so increases the risk that prices later fall significantly; investors are more likely to engage in speculative behaviour than are owner-occupiers, and they face lower barriers to exiting when the market turns down.

Last week’s Bank for International Settlements quarterly report made this risk clear. It showed that asset price deflations, especially house prices, have a major impact on economic output.

Even though the RBA has a mandate to maintain financial stability, and even though history shows that house price booms and busts have a major impact on economic output (and therefore employment, one of the RBA’s other mandates) the central bank chooses to ‘sound warnings’ on the issue of financial stability, rather than do anything about it.

Instead of the RBA, APRA and the government working together to ward off what is shaping up to be a major threat to Australia’s economic future, there is a head in the sand mentality and classic arse covering taking place.

Current policy coordination is a joke, but the joke is on us.

As I’ve said previously, you won’t get genuine change in this country until you get a genuine crisis. Given the people in the driver’s seat in Australia right now, a genuine crisis is where we are headed in the next few years.

A good example of this occurred on Lateline on Tuesday night. It lead with a segment about the budget, and how the current government now thinks that government debt of around 60% of GDP wouldn’t be too bad, even though they proclaimed a budget crisis when in opposition.

Then the two shadow treasurers proceeded to engage in a juvenile and depressing conversation about the budget while addressing none of the important structural issues.

In short, it was embarrassing.

Well before we get to government debt of 60% of GDP, Australia will lose its AAA status. That will put intense pressure on the economy. What most people seem to forget is that we have a massive reliance on foreign capital to sustain our standard of living. Right now, that capital gets assurance from Australia’s AAA rated status.

When that status goes, the cost of credit for the entire economy will rise and will plunge us into recession, if we aren’t already in recession beforehand.

Of course, a lot of this rhetoric on the budget is all about preparing the electorate for a weak as p%ss effort come the first week of May. Instead of preparing people for changes that need to happen, the government is downplaying the need to do anything at all.

That pretty much sums up the quality of political discourse in this country right now. No one has the standing to do what needs to be done. So nothing will get done.

The ignorant will continue to bask in their blissful state. The aware — that includes you, dear reader — will continue to feel frustrated and helpless as you watch this great country go further down the wrong path.

Greg Canavan,
for The Daily Reckoning Australia

Join The Daily Reckoning on Google+

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.
Reddit

Leave a Reply

2 Comments on "Australian Housing Speculation And Financial Stability"

Notify of
avatar
Sort by:   newest | oldest | most voted
slewie the pi-rat
Guest

in slewienomics, reality is not what it is cut out to be.

pi-rats have a penchant for alternate realities.
however, b/c we are pi-rats, it is not propaganda.
trust me.

what Greg is writing about is real.
i also think it has its own internal logic.
it is the same internal logic as the carney games, at the fair, as far as structural issues are concerned.

tyvm! i’ll be at the bumper boats, all week!

scottoftheantipodes
Guest

Can someone please explain how we have significant foreign capital requirements when our banking system just wishes money out of thin air using the fractional reserve banking method?

Or is this just another example of spin to justify price where there is no underlying cost base?

wpDiscuz
Letters will be edited for clarity, punctuation, spelling and length. Abusive or off-topic comments will not be posted. We will not post all comments.
If you would prefer to email the editor, you can do so by sending an email to letters@dailyreckoning.com.au