Gotti warns on falling house prices

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From the Old Dog today:

Be careful what you wish for. Right now, among many things, young Australians are wishing for lower dwelling prices and bank regulators are wishing for banks to cut back on home mortgages to investors and increase their capital ratios.

…Suddenly we are finding that builders in our capital cities, but particularly Sydney and Melbourne, cannot get finance from banks for building projects…If we achieve much lower dwelling prices then many of those builders — some are large — and their sub-contractors will collapse, sending shockwaves through the economy at a time of planned lower government spending.

So now we turn to banks, whose shares represent four of the top five listed ASX companies. Banks are at the heart of our savings and business communities. This process puts them in a profits squeeze which they will try to mitigate with much lower costs and slugging depositors.

Correct, Gotti, these things are coming. But the point to make is that they were always coming anyway with Australia’s economic model. We’ve just been extremely fortunate to see the housing bubble economy bailed out twice by successive mining booms.

The only question is do we elect to adjust on our own terms or do we take your advice and sail on until it busts. MB argued that we should do the former from 2011 onwards. Captain Glenn Stevens and his merry band of dumb bubblers thought better and have now set us up for the big accident:

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We’ve blown three chances to deflate the bubble, in 2003, in 2007 and in 2011. And now we’ll have it done to us.

I don’t recall Gotti arguing that we should deflate the thing earlier so it’s a bit rich arguing that it’ll hurt too much now.

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About the author
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.