RBA abandons disleveraging

Last night the RBA delivered an interesting sermon on property prices that shows that despite an obvious reluctance to cut interest rates, the bank will not avoid the same path of lower rates for longer that we see in other nations. Nor will there will be policy innovation in the delivery of those rates. And if it takes more credit for households to boost prices property prices and construction then so be it. They want to build more houses for growth and damn the lifeboats.

Why do I say so? Here is the the RBA’s reasoning on what makes construction tick:

With interest rates low and housing prices having picked up in much of the country, more people are now confident that either housing prices will keep rising or at least not decline. We can see this in some of the available survey measures of housing price expectations. This is important for prospective entrants to the market, particularly for developers and investors, who might otherwise be wary of undertaking a new venture or purchasing a house for fear of a capital loss.

Now take a look at the following section on financing growth for the property sector:


Over the past 20 years or so, upturns in the housing market have been accompanied by an increase in the growth rate of credit. But those years were also a period of structural change as the economy moved to a higher level of household indebtedness (Graph 4). Generations of households yet to buy their first home, or still wanting to trade up, were taking advantage of easier access to credit, which among other things had been facilitated by the shift to lower inflation and lower interest rates in the early 1990s.[2] As part of this change, the household saving rate declined and housing prices increased, at times quite rapidly. With household indebtedness no longer moving up since 2006, this long period of adjustment now seems to have run its course.

Graph 4

Graph 4: Household Indebtedness 

Click to view larger

Indeed, in recent years we have seen a rise in the household saving rate and relatively stable household debt as a share of income. This suggests that we should not expect housing credit to grow anywhere near as rapidly as it had in previous upturns. Moreover, while the recent pick-up in housing prices would tend to imply growth in housing loans – since buyers typically fund those purchases with debt – this effect will be lessened by the low level of turnover in the established housing market.

Even so, the availability of credit does not appear to be a constraint for most homebuyers and investors. The decline in mortgage interest rates since 2011 has underpinned a moderate increase in the value of total housing loan approvals over the past six months (Graph 5). This has been driven by demand from repeat-buyer owner-occupiers as well as investors.[3]

Graph 5

Graph 5: Value of Housing Loan Approvals 

Click to view larger

Despite the moderate pick-up in new lending, growth in housing credit has not increased significantly and remains broadly in line with growth in incomes at an annual rate of around 4½ per cent. Lower interest rates have given households more scope to make payments on their mortgages ahead of schedule. This means that for a given growth rate of new lending, credit growth will be a bit lower than otherwise. We can see this effect in the behaviour of owner-occupier housing credit. From early 2012, shortly after mortgage rates started to decline, owner-occupier housing credit has been growing at a slower pace than investor housing credit (Graph 6). This makes sense because the incentive to make excess mortgage payments is greater for owner-occupiers than investors given the different tax incentives they face.

Graph 6

Graph 6: Housing Credit Growth 

And now read the conclusion of the paper:

A range of indicators suggest that low interest rates have been supporting the established housing market, and prices have been moving higher in many markets, though they remain below earlier peaks in most. Also, finance is available on reasonable terms for households. With these conditions in place, dwelling construction is beginning to pick up and leading indicators point to further growth in the months ahead. In line with this, our expectation is that there will be a further gradual increase in dwelling construction activity over this year and the next. This moderate growth in dwelling investment will play some role in helping to support a gradual pick-up in economic growth more broadly from what is expected to be a rate a little below trend this year. But it is hard to know exactly how strong the recovery in the housing market might be, so we’ll continue to analyse these developments closely over the period ahead.

The corollary is that if rates of credit growth are insufficient to boost property prices and construction activity then they’ll cut some more. That will mean credit growth above income growth which is going to fall further on the terms of trade correction. In my estimation it will also mean faster credit than deposit growth which implies bank’s growing offshore borrowing. This is all already happening in New Zealand where the RBNZ also has a hawkish tone but is doing nothing.

A few years ago I coined the phrase “the great disleveraging” to capture the RBA’s grand project of working off Australian household indebtedness through lowering mortgage credit growth rates and allowing the economy to grow up around them. As you can see from the top chart they had some success but the project is far from complete. Yet gone are the very public warnings of the past few years that any increase in household indebtedness from here will increase the risk profile of the country.

So far as our central bank is concerned, household, bank and national leveraging is back. Only APRA now stands in the way of a sustained ramp up in credit.

Houses and Holes
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  1. Anyone who isn’t borrowing to the gills at the moment; at these low rates, needs to give me a good reason why.Even if rates do fall further ( which I doubt they will) what’s the problem?! Holding back on the Myers Sale in case you see the same item cheaper at Wollies seems pointless if the product you want is right there before your eyes at an historically cheap price. What you do with that debt is up to you. But building a business is unlikely to be a good starting point…..yet……

      • ToT? Most likely. So better to get your hands on the loot now, whilst its available. As I said, each to their own re application. Those who simply play a longer term yield game are probably going to do excellently.Who saw bank bill rates over 15% back in the 80’s? Few, but those who did, did well….15%! I reckon that might prove cheap as we go further into the mire.

        • PS: I’m not suggesting anything the banks ( and Governments?) aren’t already doing! Borrowing long/ investing short. Look at the teaser mortgage rates all over the place – free TVs, cash-back, holidays, discounted rates. The reason,as we all know, is to get as much short asset in place before rates launch skywards. Then just see how cheap short term mortgages are come roll-over time!

          • Janet, given the lenders are trying desperately to sell more loans in the face of decelerating credit growth and the RBA have said homeowners (rather than tax avoiding speculators) can’t grow their debt levels much higher, I am hardly surprised the RBA said this

            “From early 2012, shortly after mortgage rates started to decline, owner-occupier housing credit has been growing at a slower pace than investor housing credit (Graph 6). This makes sense because the incentive to make excess mortgage payments is greater for owner-occupiers than investors given the different tax incentives they face.”

            One wonders, firstly whether the speculator will have anyone to sell to at a price that’ll recoup their capital losses less tax in the not too distant future and second, whether we should be celebrating the fact that speculators (sorry, investors) are the preferred species.

            Talk about screwed up.

        • I agree with you on most things, but don’t agree that rates will go up anytime soon.

          Flat, maybe; but mostly down for the time being.

          Just my opinion! 🙂

          • I can handle being wrong on this one! To me the risk-cost is minimal – rates are so low. It’s like an Option play to me. Borrow long and invest short – pay the premium – because if I am right, then it’s a premium worth paying. The market never sees what’s coming – only individuals think they do!

        • I put $30k in a TD @ 18% around 1990, so I remember the times well. It felt good at the time, but I’m not so sure I long for those days again though…..

      • any other time I would be 100% with you. But it does appear that the national economic game plan here and OS is to refuel debt or to increase the debt tank and charge the economic afresh via this.

        disturbing but true. Its also telling anyone younger than 30 or 40 to load up with debt or get out of the way

  2. “So far as our central bank is concerned, household, bank and national leveraging is back”

    I think I’m going to be sick…

  3. “this long period of adjustment” = new paradigm.

    If this new paradigm continues with rents as low as they are in comparison to cost to purchase then I will probably be in the tenant pool for longer than first imagined when I sold my house a few years back.

    • BB – i think you are too soft on this great movement of housing assets to fewer and fewer owners. This may prove to be a structural change in Australia.

      The underlying egalitarianism has been corrupted and will likely never come back – people should prepare to be renters for their whole life. But we are looking at generations to bring into place the rental controls and support that Europe has.

      Renting in Australia is fine if you don’t have kids etc – but the lack of certainty in being at some rent-seekers whim is a shocking disaster for families and communities.

      • I don’t have kids, but from my observation of family and friends who do, the high impact of large mortgages is much more disastrous than those who decide to rent and have to move when the landlord ends their lease.

        Maybe my case is the exception, but I’ve been in my rental for over 3 years and likely soon to renew for another 12 months. Would be interesting to know if there are any average length of rental statistics…

        • “from my observation of family and friends who do, the high impact of large mortgages is much more disastrous than those who decide to rent”

          +1. Actually, make that +Double Digits.

        • I agree with you there BB – renting is probably better than crippling ones family with a mortgage.

          But what i’m talking about is that our poor families wouldn’t need to do this if we didn’t have a central bank and politicians that have no concept of the carnage in the housing market for new entrants.

      • I have a family, and, after 5 successive annual puntings from landlords in a row (yes, 5, and no, we weren’t burning cars in the front lawn) we realised the Melbourne rental market just wasn’t compatible with a young family. We’d had enough & bought a house.

    • Yeah, that fits nicely with another paradigm of bubble deniers – a “permanently high plateau” after a “long period of adjustment”.

      • Its completely hilarious isn’t it.

        Here is a nation completely saturated in private debt, at the peak of the mining boom utterly incapable of extracting any reasonable taxation benefit for the nation, and now with the worlds craziest global leveraging operation peering back around the corner, pipe in hand asking to be paid, with all that leverage delivered straight into the hands of speculation and ponzi – with almost NO expenditure on productive infrastructure – they start talking about more leverage – the piper is strumming his fingers and tapping his feet – time waits for no man, especially one who owes trillions.

        Ore is going to traverse the sub 90 cents mark this year – all we have seen since the 56 cents of post GFC is a massive chinese ponzi scheme based on vast quantities of cash injection from the public purse which has left the worlds largest income disparity between obscenely corrupt officials and increasingly agitated and impoverished proletariats who are well and truly sick and tired of being thrown off their land for the private profit of corrupt elite.

        Go back and look at the Ore chart for what happened 12 months after the GFC –


        That’s housing construction – that’s finished.

        That was all a false reality based on cash injections, cooked books, rigged systems and it is all going to be correct either by market forces or pitch forks and torches.

        Where does that leave the great leverage ?

        Good luck RBA.

        • +1 on the rant

          Let’s remind ourselves when this mega Ponzi will all end too, compliments of Gerard’s little piece posted today:

          “The super-cycle will end when policy-makers exhaust their ability to provide cash-flow relief to under-pressure borrowers, ending the trend to rising leverage.”

          Given we are at 3% rates centrally, despite low inflation and low unemployment figures (allegedly) and a mega mining investment boom/strong economy yada yada – this tells us that there is little ammo left in the gun to keep it all going. Further, Australia is screwed in the future should rates rise given the size of household indebtedness.

      • I think we should all try to stay calm as the high-debt-low-rates madness around us multiplies. It is unsustainable and will end in a dramatic way.

        If you can keep your head when all about you
        Are losing theirs
        … noble aim. And vital.

  4. Yes – the hidden difference is the ToT roll-over this time. The increase debt will cover over cracks for a while and get things churning.

    A lot then hangs on the US and Europe getting moving. Possible, but not certain.

    This could prove to be a devastating mistake by the RBA – they are setting up to reinforce the property is unbreakable story in a way that has bubble implications like we haven’t even tasted in Australia.

    No wonder speculators are reading the tea-leaves and are off to the races! This is now just ‘don’t fight the fed’ for property investors.

    Of course all those that use property as a home or don’t have a home are just collateral damage – there are real moral problems with this approach.

    • “Of course all those that use property as a home or don’t have a home are just collateral damage – there are real moral problems with this approach”.

      Couldn’t agree more. The notion of an egalitarian society as been steadily drifting from our consciousness.

      • The notion of an egalitarian society has disappeared as the mining boom and cheap credit has allowed the ‘have nots’ to become ‘haves’ and they now no longer think there is a need to share.

  5. Can’t resist: I told you so..a long time ago 😉

    Also, RBA is being deliberately obtuse when they suggest construction is picking up, while all the indicators point in the other direction – lacklustre housing starts, developers have seen large write downs, builders are shutting down, building material companies are closing down factories and bikie gang members have been let loose to collect dues.. Does the RBA believe all of us are effing morons?

    • It is now a given that low rates without other controls are just a mechanism to channel assets into investor/speculators that have access to existing security and cheap rates.

      Be it business or housing this is now what our central banks are doing – a have been fairly benign on the role of the RBA, but i’m moving now to seeing them in the same light that we hold the man that achieved the most to impoverish and ruin the US – Greenspan.

      Like the US the punters will be lulled into a false sense of security by the thought their houses are going up, and at the end of the long-con they will be left with nothing.

      • “low rates without other controls are just a mechanism to channel assets into investor/speculators that have access to existing security and cheap rates…”

        …and using the greed of said specuvestors to entice them to leverage up and up, setting them up to lose everything through default to the bankers.

        So ultimately, low/high/low/lower/lowest/high usury rate settings are simply a forward-thinking, long range strategic mechanism used to transfer the real assets of everyone – citizens and governments – into the ownership of the bankers.

          • I (and many) argue it is by design. Why?

            In light of the fact that the same thing has been done so many times before, I cannot for a moment believe that modern bankers are all oblivious to the effect. Especially one that so enriches themselves at the expense of everyone else.

    • Yep – the RBA strategy in this speech is exactly what they have been saying all along.

      Too many people have been projecting their own good intentions onto the RBA.

      The RBA remain completely in the thrall of the ideology that driving economic activity with private debt and the private banking system is the only way to manage the economy.

      Public institutions are often wax museums for ideas that should be dead and buried.

      The RBA is no exception.

        • Pretty clear?

          Where apart from tin plating occasional asides have the RBA stated that they believe circa 160% household debt to disposable income is a bad idea or results in a constantly fragile household sector that needs near ZIRP to remain afloat.

          The RBA think 160% is cool – a permanent new plateau.

          They dont even feel the need to indicate what % might be a cause for concern or a platypus.

          You are projecting again.

          • Righto, let’s say some can see it. Certainly senior levels. There have also been exhortations to fiscal spending, as well as repeated references to the correction in household spending that we had to have.

        • “It’s pretty clear they can see the folly of it all. But are going to do it anyway.”

          If they know it will end in a disaster they why do it?

    • ….but from the UK
      “High house prices offer best way to pay for long term care…. more people should be encouraged to borrow against property to fund care for frailty in old age….Older people have saved, through workplace pensions and other means, but the returns have often been disappointing. House prices are a bubble but provide one means of funding long term care.”

    • It certainly feels like it – there is no way a bit more debt can paper over a ToT roll-over.

      But then low rates can keep a bubble going for a long time – are we at effective zirp for Aust? How low can the RBA go?

    • David with that first chart, Debt to disposable income, Australia is still right at the top.

    • “How we got to these “great settings” are just peripheral, non-macro issues, as are the downsides like the high AUD, higher house prices and fading manufacturing industry.”

      Yes, it’s all just a means to an end, right? Absolutely no ability to imagine what might happen in the future. He’d have been very happy in the Celtic Tiger Ireland of yore.

    • Yes but unfortunately with any credit-driven demand bubble, things always look the brightest just before dusk.

  6. reusachtigeMEMBER

    So the RBA have admitted that their charter is to pump house prices. Dog help us! So is MB going to keep calling for more ridiculous interest rate cuts to support this stupidity?

    • MB hasn’t called for interest rate cuts. It’s pointed out that within the current frame of reference the economy was not strong enough to not have them.

      All along as well we have campaigned for policy innovation to ensure those cuts go into dollar weakness not specufester’s pockets.

        • Fabian AlderseyMEMBER

          This certainly seems to be the case. HnH, what’s your take – how likely do you think policy innovation is, in what timeframe?

          I keep hearing “they should do this and this”, for how long – a year, year and a half, longer? – and it doesn’t ever resolve one way or the other – that is, accept that it’s not going to happen and stop saying “should”, or in some way express much more anger/ frustration that it’s not happening.

          I don’t know what the answer is, it just seems to be a constant unchanging loop.

    • HnH I see you’ve removed my comment so I’ll tone it down. How about this?

      I cannot find a documented statement in the RBA charter for house price growth and therefore am confused why it is legal for them to blatantly target this.

      • ZeroHedge this domain is not Andy. Unfortunately.

        Because then RBA officials could be described in all the colourful terms they thoroughly and utterly deserve.

  7. Deus Forex Machina

    I thought the RBA were different, I really did, but perhaps they are just the same as the CB brethren from around the globe.

    I like the way Mincack summed it up in the other piece this morning,

    “The super-cycle will end when policy-makers exhaust their ability to provide cash-flow relief to under-pressure borrowers, ending the trend to rising leverage…The downside is that in the next downturn – whenever it comes – central banks will find it even more difficult to provide cash-flow relief to borrowers.”

    Yep dis-leveraging is just not what Central banks want.

    Nice piece Dave



    • The super-cycle will end for Australia when foreigners decide Australia is no longer such a good place to invest. Probably about the time that commodity prices finally get a serious correction.

      The dollar will crash, we will have a huge bout of import-fueled inflation, the RBA will have to raise interest rates and all hell will break loose. Probably double digit unemployment, massive crash in property prices, mortgage defaults left, right and centre, budget deficit through the roof etc etc.

      Capt Glenn is just praying it doesn’t happen on his watch.

      • That is exactly right and is the scenario I fear in 2014 as ToT corrects and mining investment tumbles. If it came to it and it was a choice between breaking the 3% band or plunging into a recession, I reckon straight shootin’ Glenn would give us the latter.

        • The only possible saviour could be that the RBA will choose to “look through” the burst of inflation as being a one-off. I think it will be too big to ignore, however.

          • I don’t think so. If the dollar falls to 80 cents and it’s all of the tradable sector joining the sticky non-tradables in a huge rush then there’s no way to look through it.

            You’ve gotta reset or give up like the UK.

          • Got to agree with that. Not to mention the risk that the dollar will overshoot on the low side and go well below 80c.

          • Alex, the AUD overshooting to the downside surely has to be a strong possibility? Who can forget its plummet from 98c in the GFC and the RBA stepping in to defend it at 60c; and that plummet based on northern hemisphere panic, rather than any specific concerns about our own economy swirling down the toilet.

          • Theres loads of us been saying this for ages.

            Op8reds thoughts on overshooting the other side would have to be right on the money too.

            But it does mean we are going to get circa 6-9 months of spruiking like we have never seen, ramping up of specious economic stats, and every last exertion to get the economy to lift off.

          • Gunna, having observed what happened to the AUD in the GFC is the primary reason why this simple small businessman has broadly opposed government action that has greatly increased our public debt without increasing productive capital. While others shriek “low” percentages vs “the rest of the OECD”, what I have seen is a massively leveraged private sector supporting an Ireland-like banking sector, a sure-to-end-sometime mining boom, and a government willfully kicking the private sector debt can down the road, by rapidly increasing public debt, aided and abetted by the central bank’s usury rate policy. I happily recognise the truth of the claim that our public debt is “low” … but not when all those chickens come home to roost. In essence, our erstwhile leaders have, post-2008, simply weakened our economic fundamentals rendering us the more vulnerable to an almighty crash. Given the position of our economy and government budget & balance sheets pre-GFC, that AUD plummet to 60c is, to me, something of an omen of things to come.

        • That is exactly right and is the scenario I fear in 2014 as ToT corrects and mining investment tumbles

          The you can change the blog title to “Houses and A-Holes”. That would still accurately describe Oz. 😀

      • Alex that is probably the likely scenario that will play out. At the moment RBA is caught in a vice, it can’t hold or raise rates yet because it will fuel the dollar higher, it must cut to (somewhat) protect exporting industries but then that is reinflating the bubble. As some what of a lay person i wonder whether the AUD when it comes off its parity run whether it will be someone gradually turning off the tap or more like an on off switch with the consequent explosion in inflation.

        • Usually it is a mad rush for the exits. A country either is a popular investment destination or it isn’t.

          Australia is worse than most because of our huge commodities exposure.

        • Bad news for a lot of people. After unemployment here peaked at 11.1% in the early 90s recession it took over a decade to reduce to current levels. That is a lot of production permanently lost.

          That is the ABS trend figure I am quoting. I hate to think what the Roy Morgan figure would have been.

        • I can see the Mary Hopkins song being covered by a lot of bands:

          Those were the days my friend
          We thought they’d never end
          We’d sing and dance forever and a day
          We’d live the life we choose
          We’d fight and never lose
          For we were young and sure to have our way.

    • I’ve been aghast ever since it became apparent that the RBA was intending to promote credit growth, rising house prices, and increased housing construction as an antidote to falling mining activity.

      It just blows my mind whenever I see people wondering what will need to be done to ‘fill the void’ when mining investment slows down. When you have an investment boom (non-housing), it is because businesses have decided that there is an abundance of productive investments on offer. In the case of resource investment booms, there is always excess exuberance. But the key point is that the rush of investment is directed into productive assets. The goal is to produce cash flow, not inflate GDP figures. The increase to GDP growth is incidental and anomalous, it is not a goal in and of itself. So when the boom winds down, it is because the investment pipeline has been exhausted. At that point you just accept that the economy will now experience lower growth. You don’t wring your hands over lower GDP growth figures and go on a housing construction tear just to keep the dream alive.

      It’s not only preposterous in theory. Empirically it’s been demonstrated to be an utter failure.

    • +1 I had really through these guys where giving things a harder look.

      Clearly they’re not. Clearly they are just another bunch of rich bankers with a guaranteed income of 500K+ a year that are happy to impoverish their people so their mates in the corporates can own the country.

      The punters need to stop thinking these central banks are benign.

  8. Well I have to say, the RBA got me on this one. I didn’t think it possible to genuinely reignite property. This surely a dangerous portent: mining boom unwinding, ToT retreating, rising foreign credit, subdued incomes, rising unemployment (I see Peter Jonson uses the Roy Morgan figure as most accurate).

    I think MJV makes a good point above, once again we venture into non-productive assets.

    Whilst we are not the same as the US re sovereign debt etc are there enough echoes here to chill:

    “Not only will the economy move gradually toward a pronounced condition of stagflation, but, more importantly, the bubbles being created by the Fed will be far greater and more devastating than any other in history. Equity and real estate prices are already stretched far beyond what their underlying fundamentals can support. But they are nothing compared to the distorted valuations being applied to U.S. sovereign debt. The bursting of the bond bubble will be exponentially worse than the deflation brought on by the Nasdaq and real estate debacles. It is sad to conclude that the middle class is set up to get slaughtered even worse than they did when the previous two bubbles burst.”


  9. Janet has given us a view on how to prepare for this. Any other thoughts – borrow, fix & buy OS property (assuming you can handle the debt), FX play seems more liquid & easier, other thoughts?

    • My plan is to hide under some coats and hope that somehow everything will work.

      That, and avoid debt any kind of debt that I’m not confident can be paid off comfortably and soon.

  10. Meanwhile, banks on an absolute tear again today. Westpac up 1.8%.

    The seamless transition from Holes to Houses is all going according to plan.

    • I’m beginning to think the RBA never had an alternate strategy. Pumping the real estate market was going to be fastest way to keep the economy afloat once they realised the mining boom was no more. They simply couldn’t wait for manufacturing and other sectors to take over.

    • Interesting point. I know more than a few recent migrants (we came back to Australia last year to firm up my kids english education and give my wife some time here on a residency visa).

      Of late there has been few talking about heading ‘home’ (generally Europe/Eastern Europe in the cases I know about) for a while as things turn to merde here. I now have the Mrs suggesting the same thing. Fortunately we didnt convert the family cash stash into AUD.

      I also have mate (Australians working OS) – One lives in Dubai and I caught up with him for a few refreshers when he was in town about 3 weeks ago – he was firmly of the view that now is not the time to be returning to Oz.

      That said, demand to move to Australia is always going to be running far stronger than demand to move out – although the returning migrants I was on about all talk about the same things people talk about here, ludicrous real estate, expensive prices for almost everything, and lack of professional work.