Chris Joye has followed-up on his fine work last week, warning over imbalances that may be developing in the housing market in the above Radio National interview, aired Sunday morning.
According to Joye:
- Australia’s banks are incentivised to maximise credit growth in order to maintain pre-GFC levels of profitability. Accordingly, Australia could face a “perfect storm” whereby the near record low interest rates combines with relaxed lending standards to generate “super strong house price growth that’s allowed to run too far”.
- Combined with near record levels of consumer leverage, when the RBA eventually responds with higher interest rates, Australia housing could experience a “significant correction”.
- There’s “an element of complacency in the community. We think policy makers have the ability to diversify away the business cycle – we haven’t had a recession in Australia for over 22 years – and my fear is that the constant call on policy makers will have unanticipated consequences down the track”.
- It is almost inevitable that Australia’s financial regulators will need to emulate New Zealand and implement macro-prudential curbs on mortgage lending. Australia is approving about one-third of home loans above 80% loan-to-value ratio (LVR) and about 15% of all property loans are above 90% LVR. So we are “arguably already starting to see a slight relaxation of lending standards. And if we want to maintain low interest rates, the only other choice the regulators have is to try and throw sand in the gears of credit creation through other means. So they can force the banks to hold more capital against these riskier loans to discourage them from undertaking these riskier activities”.
- There are some commonalities between Australia and the US in the lead-up to the GFC. The US Federal Reserve was lambasted by the RBA “for keeping rates too low for too long. And that was one of the key drivers of the boom that in turn lead to the deterioration of lending standards… We are seeing unprecedented levels of rates [in Australia] – we’ve never had rates this cheap before. We’ve got unprecedented levels of leverage. We’ve got very strong house price growth. And it’s not inconceivable that this could end in an ugly way”.
- Australia has “huge constraints on the supply side… so the development industry does need those price signals”. But Australia should look at other measures [presumably planning reform] rather than maintaining interest rates at “crisis levels”.
- The RBA has been “excessively insensitive to the risks of these GFC syle imbalances”, but they are “pretty cagey right now”.
All very sensible from Joye and hard to disagree.
My only observation is that governments of all persuasions have for too long abrogated their responsibilities for housing policy to the RBA – allowing affordability concerns to be addressed via continuous lowering of interest rates, rather than addressing the underlying causes of poor affordability through supply-side and taxation reform.
Implementing macro-prudential controls on mortgage lending, along with jawboning by the RBA on the need for structural housing reform and changes to tax arrangements (e.g. negative gearing), would force governments to take responsibility for housing and address the problems head-on via policy reform.
