Is the RBA ready for a housing spring?

To date, the RBA rate cut campaign that began 10 months ago has had two apparent effects.

The first is on retail sales, which have had a much better 2012 than 2011 as more disposable income was made available to punters:

The second is on house prices, which have stabilised as those punters that are still willing to buy have been able to borrow more relative to income, which is showing up in the average loan size:

This is now leading to predictions that the housing market is in revival. From David Basanese today:

Along with my call for a likely lowering in official interest rates by 1 percentage point over the coming year, it stands to reason that this might well be positive for house prices. Indeed, my research suggests that given the prospective improvement in home affordability in the coming year, nationwide house prices could be ready to pop 10 to 15 per cent higher by late 2013.

…The results suggest that as at the June quarter, the mortgage repayment as a percentage of disposable income was around 6 per cent below the average since mid-1986. While house prices to disposable income were 16 per cent above their long-run average, this was more than offset by below-average mortgage rates.

…Note, moreover, that while house prices to income are now above average, they’ve broadly held at this higher level since mid-2003 – suggesting the move (as I’ve long argued) was a sustainable one-off adjustment due to the structural drop in mortgage rates. As Reserve Bank governor Glenn Stevens once remarked, if house prices are in a bubble then they been that way for an extraordinarily long time.

…Note in the year to June 2010 nationwide house prices as measured by the ABS rose 16 per cent.

I’ll simply say in passing that this argument is rather light on. Here is the Housing Association Affordability Index:

No doubt there’s been an improvement but it’s hardly cheap. Moreover, Bassanese’s measures of income affordability ignore the following chart from the RBA from September 5:

That’s hardly cheap either.

Moreover, predicting a rerun of the 2009 blowoff discounts the effects of the fiscal stimulus of the time, which were pretty important. For instance, I’m sure we’ve all seen the following chart of the great first home buyer bulge:

So, barring fiscal stimulus aimed at housing, a repeat of 2009 is very unlikely.

I’m of the view that the shift away from debt is structural (so, I thought, was Bassanese) so it seems to me quite unlikely that we’ll see a resumption of anything other than ephemeral growth in house prices.

But, I might be wrong. If new lows in interest rates fires up another convulsion in our housing obsession then it will involve a shift back to grossly unaffordable levels and a further ill-advised expansion in household leverage. Given the economy is going to need lower rates as the mining boom fades and the dollar clearly needs to come down, one can only hope that the RBA is ready to innovate with the jawbone, new macro-prudential tools and/or dollar intervention.

David Llewellyn-Smith
Latest posts by David Llewellyn-Smith (see all)

Comments

  1. Direct intervention in the FX market seems like the best option. As many have pointed out, Australia desperately needs a weaker currency but not lower rates.

      • the RBA is ok its the credit tools that need an overhaul but that is really outside the RBA’s mandate so needs to come from fiscal policy makers not monetary. Like how Canada has just capped mortgage repayment periods at 25 years i.e no more 30 yr mortages. This is the sort of thing, or sort of thinking, we need here.

        • Agree 100% on the need for macro-prudential tools (e.g. LVR restrictions). But I disagree that it is beyond the RBA’s mandate. They are, after all, responsible for financial stability. They also sit on the Council of Financial Regulators, along with APRA, ASIC and the Treasury. So they should be working with these agencies to implement such measures.

          Also, other central banks are examining/implementing macro-prudential measures.

          • +1 on the LVR restrictions Leith,

            BUT….

            ..LVR restrictions must be in place BEFORE rates are cut further…shut the gate before the horse bolts.

          • APRA can control LVR’s but would they want to. Only a small percentage of 95% LVR loans are written, and they are not problematic.
            Bassanese was assuming another 1% reduction in the interest rates, and if that happened he might be right, but will we get a 1% reduction.
            Personally I don’t think that we will see a rate reduction of that size and gains of 10% to 15% although we shouldn’t be surprised regardless of what happens. It’s not as though we haven’t seen surprising results before in housing.
            We have a workforce that has never before been so highly paid and had such buying power – I think that our PPP is now above the USA – 14 years ago it was about half- is it any wonder that they spend?

            3d1k is right, everyone is getting the benefit and they don’t know it, but that benefit has side effects.

          • i see where you are coming from and it starts to get blurry but still reckon when it comes to credit tools (rules that limit how credit is distributed and sold by private enterprises) its really fiscal policy rather than monatery policy so its the governemnts job more than the central banks? maybe not fiscal policy so much but regulatory policy for the credit industry. No more 30 yr mortgages, no more >80% LVR’s, I would have thought those sort of changes are the sort of policies our politicians should be legislating through parliment rather than monetary policy makers?

          • We have a workforce that has never before been so highly paid and had such buying power – I think that our PPP is now above the USA – 14 years ago it was about half- is it any wonder that they spend?

            What you forgot to mention is that all that buying power is financed by debt, with our private debt at >100% of GDP.

            But then, I can hardly expect a mortgage broker to say that.

          • mav – enough with the strawman arguments.

            Workers in Australia are paid much higher than most countries, and our dollar now buys more than a $1.00USD – in the late nineties it bought about $0.50USD so the man and woman in the street can buy goods that were once prohibitively priced.

            That buying power isn’t financed by debt, it’s financed by wage growth and currency strength courtesy of the mining boom.

            As I said above, that buying power has side effects.

          • Workers in Australia are paid much higher than most countries

            No doubt.. but that doesn’t negate the fact that our private debt to GDP is > 100%.

            That buying power isn’t financed by debt, it’s financed by wage growth and currency strength courtesy of the mining boom.

            I think I’ll let Flawse handle that argument. As he keeps pointing out, the buying power is financed by asset sales and increased debt.

            As for currency strength, it is due to a number of factors:
            1. The rest of the world is busy printing money and debasing their currency, while we admire our high AUD and the trinkets/junkets it buys.
            2. We have mis-allocated our capital into houses and hence, most of the mining investment is driven by overseas investors.

          • “mav – enough with the strawman arguments.

            Workers in Australia are paid much higher than most countries, and our dollar now buys more than a $1.00USD – in the late nineties it bought about $0.50USD so the man and woman in the street can buy goods that were once prohibitively priced.

            That buying power isn’t financed by debt, it’s financed by wage growth and currency strength courtesy of the mining boom.

            As I said above, that buying power has side effects.”

            I think Mav might have a point though Peter.

            The biggest, longest-running surge in private sector credit growth in history has surely underpinned a significant amount of the income growth that has occurred over the past decade.

          • Leftee – mav is confusing the argument. The average man or woman doesn’t consider the TOT when they buy a house, car or new TV – they buy with what is in their pocket, or what they think they can afford, and high wages and our high buying power has made spending money possible like never before.
            Mav needs to confront that reality.

          • WTF!

            they buy with what is in their pocket, or what they think they can afford, and high wages and our high buying power has made spending money possible like never before.

            ..hahah.. Good one, Pete. What era are you stuck in your time machine? the 1950s??

            Mav needs to confront that reality.

            You need to confront the reality that you cannot understand something when your salary/income depends on you not understanding it (h/t Upton Sinclair).

        • The only guarantee you can get is that the RBA will do everything EXCEPT the right thing, in order to perpetuate the bubble for as long as possible.

    • + 1 precisely

      a rate reduction that spurred a housing boom from here could be disastrous.

      The McKibbin idea of doing direct deals with central banks buying AUD could be useful there…

  2. Masterful unwinding of the property bubble by the RBA and various state Gov simultaneously withdrawing FHB incentives… (+ various other tactics)

    In fact it’s so masterful that Australia is now looking to replicate the 20 year property value correction endured by Japan…

    The entire boomer generation will be dead before it bottoms!

  3. For predictive capacity I would rate Bassanese with John Edwards (now on RBA board) which are only useful as a means of capitalising by doing the opposite. What is the swing factor is unemployment and fear of unemployment and also the new factor of outrageous increases in government and council charges on overleveraged participants

  4. Bassanese doesnt exactly have a great track record picking tops and bottoms of anything over the past 5 years. Although that doesnt stop him continuing to roll out his predictions. If he reckons property prices nationwide have bottomed and are about to “pop”, good on him.

  5. I think the most important difference between now and 2007 is not so much additional stimulus, its the fact that house prices (at least in melbourne) are a lot higher now relative to inflation than back then ie less room to move.
    That said, i dont entirely discount more dumb govt interference, nor do i underestimate the stu[idity of the average Australian when it comes to property.

    • Right on both counts. Every country that has printed money and bailed out banks entered its crisis pledging not to do these things. We have yet to bankrupt our country by saving the banks and implementing our own QE Infity. A little more housing stimulus is guaranteed, as is our house bubble obsession.

  6. So the plan is to ensure that baby boomer’s kids will never see affordable house prices I guess.

    Perhaps 20-30 years from now I will become a blabbering old man old man convinced that a housing price correction is just around the corner while governments keep printing money and collecting my tears…

    • I’m with you there. Consigned to a life of serfdom to those who’s birth right it was to own the roof over our heads and who’s grace we may remain as long as we pay our dues.

    • Don’t get too excited to quickly! The house price to income ratio is scaled at the left hand side. Mortgage rates only on RHS.

    • dumb_non_economist

      Mav,

      Anyone here saying that incomes have kept up with RE prices is talking pure bullshit. In ’95 when I was 35 I bought a place on the Canning River in Perth for 250k and was earning 100k, for a 35 yr old to buy that place now, worth 1.2m at the same income/price ration needs to be earning 480k.

      For PF or anyone else rabbiting on about incomes etc is nothing but pure crap. What has kept most spending has been through debt, borrowing against the house ATM machine. End of story.

      The number of people over the last 2 decades buying cars and holidays via the house is just mind boggling.

  7. Jumping jack flash

    “Given the economy is going to need lower rates as the mining boom fades and the dollar clearly needs to come down, one can only hope that the RBA is ready to innovate…”

    We should definitely tread carefully when manipulating the dollar at the end of the greatest boom in history.

    Some questions need to be asked and answered before sauntering up to the dollar with a machete.

    What is the baseline? How much has the dollar been affected by US printing? How much has the dollar been affected by mining booming? Does our enormous debt bubble have an impact, as that is surely fading away too?

  8. More importantly, the shift away from debt could potentially be a generational and cultural paradigm shift. Only time will tell. For now, Basanese is in fairyland and his methodology and reasoning is poor at best.

  9. There may be something of an improvement in auction clearence rates and prices – but housing credit growth continues to crawl along at the slowest pace on record.

    If housing credit growth begins to accellerate again, then I’ll start to think about the possibility of a resumption of the old “normal”.

  10. So housing is “affordable” because interest rates keep getting cut?

    Is this a guarantee that interest rates cannot be raised for the next 20-30 years?

    This is a mighty funny approach to the brief that future RBNZ Governors will have.

    A pox on the boomer generation who are doing this to their own children. As Leith Van O has pointed out too, the culprit is utopian urban planning – otherwise “supply” would have maintained “purchasing power parity” in housing too (just as it has done for most other items in household expenditure), and there would be no need to try and use faerie-gold interest rates to do it.

    I think Leith is far too generous about the role that credit restraints can play in restraining house prices; there are plenty of examples in economic history of tight credit and severely unaffordable housing going along together – the UK for much of its history, and especially South Korea from about 1975 onwards. Urban planning is the culprit.

  11. The QLD governments withdrawal of the FHBs grant on established properties is starting to take effect;

    Grant cut puts pressure on home prices

    Harcourts Townsville City agent Julie Mahoney said there were fears the loss of the grant would deter first-home buyers, with vendors ultimately paying the price as the budget-conscious market looked set to tighten the purse strings further.

    As it is, the vendor discount average for Townsville has reached more than 18 per cent in some suburbs.

    The minimum discount is still about 7 per cent.

    http://www.townsvillebulletin.com.au/article/2012/09/22/362601_news.html

  12. And Glenn the Great, strode forth, and slew ten thousand feculators with the ass bone of a jaw. The arsebone of a what??