According to the SMH echo chamber, the RBA’s Luci Ellis concluded her misleading speech today with a Q&A quip:
‘‘I think there are a lot of people, the minute housing prices start to pick up they say, ‘Oh my goodness, we’ll all be rooned’’’, Ellis said. ‘‘The minute housing prices start to pick up they imagine it’s a bubble.’’ Housing prices have been picking up recently but, taking a longer view, they have been ‘‘cycling around’’ the trend in household income, she said.
With due respect to Ms Ellis, her record on diagnosing housing risk is poor. In December 2006, Ms Ellis published a research paper arguing that the US run-up in housing values (and bank balance sheets) was a positive development:
The resulting expansion in both sides of the household balance sheet is an important development for policy-makers to monitor, but it is probably not of itself a cause of financial instability… Particularly in North American markets, simple ratios have given way to credit scoring and risk-based pricing, so that loan sizes and pricing are more closely tailored to individual borrowers’ circumstances. To the extent that this reduces the margin of safety for some borrowers who are now able to borrow more than the older practices would have implied, this might mean that more households are facing greater financial risks than previously. But overall, this easing of financial constraints is a reflection of their ability to repay and withstand those risks. Therefore it cannot be assumed that a shift away from the earlier lending practices based on rigid ratios implies that financial vulnerability has increased in any significant way… The most important lesson to draw from recent international experience is that a run-up in housing prices and debt need not be dangerous for the macroeconomy, was probably inevitable, and might even be desirable.
One would have thought that humility and caution would be advisable after the event. In the post GFC world it is a pre-requisite that the head of financial stability be a “housing Hanrahan”.
