Politico-housing complex discusses the bubble

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At a conference yesterday, CEO of CBA Ian Narev has joined the chorus of commentary fingering a lack of “confidence” for Australia’s growth woes:

”I am absolutely confident that all direct and indirect consequences for the property market that may flow from a change in interest rates are absolutely thought through by the governor and his board,” he said at a conference in Sydney.

”I do not lose a moment’s sleep thinking about that. They think very carefully about a range of issues, they are absolutely aware of what effects different interest rate settings might have on the economy and I’ve got a lot of confidence that they … have a good perspective about that.”

Mr Narev said foreign investors ”always” wanted to talk about Australian house prices, but ”stress tests” had found the bank would survive a severe housing downturn with price falls of up to 40 per cent.

Yet, on the same panel we got this from real estate agent John McGrath:

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Mr McGrath, the chief executive of McGrath Estate Agents, says the ­Sydney market is “hot, hot”, citing auction clearance rates above 80 per cent over the past three months.

“I haven’t seen it this hot since the last real estate boom,” he told a mortgage brokers conference in Sydney.

“If there is pressure to keep growing at this level – which I don’t suspect we will – quarter after quarter after quarter, we’d probably end up in trouble because we just can’t grow this rapidly.”

Other experts – although no one as prominent in the property industry – have raised concerns low rates are doing more to drive up prices of existing homes and apartments rather than encourage new building, which is a goal of the Reserve Bank of Australia.

Banks, wary of over-extended customers, are closely watching the ­surging market. Commonwealth Bank of Australia chief executive Ian Narev said banks had to be careful because some borrowers could find it more difficult to pay their mortgages when rates inevitably returned to more normal levels in the years ahead.

“There are advantages in the low interest rate environment and there are risks to make sure we’re aware of the whole spectrum,” he said.

“Nobody is exuberant and saying ‘for god’s sake make hay while the sun shines’,” he said.

So what is it? Exuberant or lacking confidence? Andrew Wilson had the answer:

Australian Property Monitors senior economist Andrew Wilson said there was no prospect of a so-called property bubble.

“Talk of a property bubble is predictable attention-seeking nonsense as historically low interest rates generate strong market conditions in an environment of pent-up demand and confidence,” he said.

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Confidence!

Back to Narev and there was, again, more confidence:

Mr Narev said the economic outlook was positive. “We love the fact that we’re so dependent on Australia as an economy because it’s a growth economy,” he said.

“In the short term there are some confidence challenges and we’ve all got to be aware of those and just maintain a degree of conservatism because there are different ways that can all run.”

“So being watchful is the right thing to do.”

So, we have a economy lacking confidence, with overheating asset prices, that is no cause for concern, but must be watched closely. Clear as mud!

The fact is none of these chaps either has a clue or is letting on that he does. What we have is an economy dominated by two huge simultaneous changes. The mining boom is going bust, which is suppressing economic activity and yesteryear’s credit-driven services economy cannot and is not growing like it used to because to do so it would have to borrow money offshore and expose the country to the same financial instability that blew it up in the GFC (albeit saved by stimulus).

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The role of “confidence” in all of this is largely irrelevant, except to the extent that none of these chaps is making any sense, which doesn’t fill one with faith.

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.