Callam Pickering at Business Spectator continues the drum beat about falling house prices today:
What has been interesting about this boom is how localised it has been. Outside Sydney and Melbourne growth has mostly tracked incomes.
Speculative activity is the distinguishing factor between Sydney and Melbourne compared with the other capital cities. The strong growth in Sydney and Melbourne simply cannot be explained by fundamentals such as income growth or construction costs. The likes of Brisbane and Adelaide have experienced little growth in speculative activity and consequently observed little price growth.
He then describes the three factors that drove past price rises, all of which are reversing:
First, banking deregulation, low interest rates and low inflation created an environment where households could borrow more than ever before.
…Second, favourable demographics – such as the rise of two-income families – were a boon for the housing sector. But with female labour market participation no longer rising and overall participation on a downward trajectory, our demographics have finally begun to work against the housing market.
…Third, the resource boom led to an unprecedented period of economic prosperity for Australia. Strong income growth and over twenty years of uninterrupted expansion created a perfect environment for housing speculation but also for legitimate price growth.
All well known stuff and absolutely in line with why MB sees this housing cycle as highly risky. The focus on structure is spot on. The Joye vs Keen debate yesterday was about timing: Steve Keen is now arguing that house price rises will continue on his credit impulse as Chris Joye warns that they will fall if interest rates normalise. But it’s economic structure that will decide the outcome
How so? Our economic imbalances mean that interest rates have about as much chance of normalising as I have of opening the batting for Australia at age 47 (despite my excellent technique). Interest rates are still more likely to fall than rise (although there is some lingering risk that authorities will wake up and pull back negative gearing or add macroprudential tools, which would change things).
No, the risk to house prices is that they’ve been inappropriately used as a post-mining boom macro economic stabiliser. The RBA is busy inflating property prices just as our economic fundamentals deteriorate. Yet reliance upon housing speculation for growth as business investment collapses owing to poor competitiveness is the precise opposite of good public policy. We should be looking to engineer higher productivity and falls in the real exchange rate, not inflating away any final remnants of tradable edge that we have left.
That’s the risk to house prices: that the cyclical party runs out economic booze as China slows, the terms of trade and business investment tumble, unemployment rises and the dollar refuses to budge until it’s too late. In that scenario house prices roll over as interest rates fall and Callam Pickering’s structural inhibitors mean a bottom is not easy to find.
