How the world has turned. From the AFR (charts courtesy of the author):
…According to a valuation benchmark regularly cited by the RBA – Australian house prices divided by family incomes – the asset class is three months from piercing the valuation peaks touched in June 2006 and June 2010. After both episodes, home values fell: by 6.1 per cent in 2008 and 6.6 per cent in 20011-12 according to RP Data…And there’s no evidence the boom is abating.
..Acknowledging a burgeoning bubble is awkward for the RBA given the conflicts between its monetary policy objective, which requires super-low rates, and its “financial stability” mandate, which is tasked with preventing imbalances, like destructive bubbles, being induced by abnormally cheap money. The governor has also questioned the merits of “macro-prudential” policy, which are tools that limit lending, suggesting rate hikes might be the best tonic. To get the discounted variable mortgage rate back to normal, which is around 6.6 per cent, the RBA would have to lift borrower repayments by 30 per cent. If inflation becomes an issue like it was in 2007, home owners could face variable rates over 8 per cent. Either of these outcomes would likely induce significant price corrections as buyers cut expectations of capital gains, which are being biased upwards by current experience. When prices do start sliding, it is not inconceivable that we could see unprecedented 10 to 20 per cent losses across the board…My message is: buyers beware.
Where is Steve Keen right now?
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But seriously, there’s more than a little scare-mongering here. I agree with Chris that the Glenn Greenspan agenda is lunatic but there is absolutely no way known to man that borrowing costs are going to rise by 30%. Zero.
The dollar is unhinged and running. Tradable inflation is about to get hammered back into its place and, even if it doesn’t, because of the structure of the housing boom – all speculators – a couple of rate hikes and well placed words from Glenn Greenspan and it will be snuffed out completely a’la 2003. What will be different this time is that the crunch will be just in time for the capex cliff.
Chris is absolutely right about one thing. The RBA has royally stuffed Australia’s post-boom adjstment
David Llewellyn-Smith is Chief Strategist at the MB Fund and MB Super. David is the founding publisher and editor of MacroBusiness and was the founding publisher and global economy editor of The Diplomat, the Asia Pacific’s leading geo-politics and economics portal.
He is also a former gold trader and economic commentator at The Sydney Morning Herald, The Age, the ABC and Business Spectator. He is the co-author of The Great Crash of 2008 with Ross Garnaut and was the editor of the second Garnaut Climate Change Review.
