The AFR has a good story this morning warning of a resumption in the property bubble:
The Reserve Bank of Australia and banking regulators are being warned that low interest rates could reinflate a property bubble, leaving the economy more vulnerable to a crash.
Moody’s Investors Service, which recently conducted stress tests on Australian banks, said that while the banks were currently sound, “you can see issues arising”.
“We’re now looking at things perhaps going the other way if you do see a little bit of an increase in [property] prices,” Moody’s senior vice-president Patrick Winsbury told The Australian Financial Review.
“The question is how the banks react with new lending.”
Former Reserve Bank board member Warwick McKibbin told the AFR: “If you’re transferring a bursting bubble from the commodity boom into a bubble in the housing market, when it bursts it’s going to be much more catastrophic.”
The Australian Prudential Regulation Authority and the RBA have suggested in recent weeks that they are already warning banks to maintain credit standards to avoid a US-style lending surge.
This is an obvious risk. But I remain pretty sanguine about its likelihood. I know Australia is property mad but I fail to see how the post-GFC deleveraging pulse, rising unemployment and an end to the miming boom can trigger a renewed frenzy. Could be wrong of course. Hence the word “risk”. At The Australian meanwhile, the risk translates into an outright festival of spruiking:
THE head of property for the Future Fund, Barry Brakey, has warned that low interest rates around the world and in Australia could lead to such strong growth in property values that it could create bubbles in some markets.
…Australia’s property markets had already attracted offshore funds and many more were waiting to deploy capital into Australian projects, but all were looking to invest in core property and there was a limited availability of high-quality holdings being offered for sale.
…Investa chairman and chief executive Scott MacDonald told the forum that property values could rise by 15 per cent to 20 per cent a year during the next few years.
“I think it’s going to be that dramatic,” he said, adding that he was “very optimistic” about the outlook for Australian property.
But he said that could lead to a fresh spate of development and the oversupply of buildings.
This is completely delusional. There is just no way the credit will be available. A much better take, in my view, is offered by Robert Harley, back at the AFR:
Housing often leads the economy out of holes, contributing about 6-7 per cent to gross domestic product.
Activity has wilted in the backdraft of the resources boom. Today its contribution is about 4 per cent.
In August, new house sales fell to a 15-year low according to the HIA. Discounting on land remains rife, particularly in Victoria.
Stockland has a Reality Cheque offer of $10,000 to new land buyers. Rivals are offering up to $30,000 in benefits, even cars.
Consumers are deleveraging and cautious; trades prices are not falling to the same extent as in past recessions; bankers are quibbling over valuations; development finance is tough; and, despite years of debate, the supply of ready land remains constrained.
I would only add that in the past housing lead Australia out of every slump, not “often”. I agree completely with Harley’s assessment of the challenge too. Buying a new house makes even less sense than buying an old one in a topping bubble. The RBA will have to get house prices moving or there will be no construction recovery.
The trick will be containing it.
