Former RBA man pricks Capt’ Glenn’s bubble


Chris Joye brings the pain again today in an excellent interview with Jeremy Lawson, a former senior economist at the RBA, who calls the housing bubble what it is, from the AFR:

…As an economist focused on investing Standard Life’s capital around the world, Mr Lawson said he can take a longer-term view than “sell-side” counterparts inside investment banks…it is “reasonable to assume that future house prices will grow in line with real household ­disposable income as the commodity boom unwinds…That would imply overvaluation of between 20 per cent and 30 per cent”.

…“Overall financial conditions have probably been too loose and that has undermined longer-run financial ­stability…Part of the problem is that rates are being relied on to do too much work…I would like to see the RBA and APRA make much more active use of ­macro-prudential instruments. That way you can have both low rates to support the overall economy while maintaining tighter credit conditions for riskier sectors.”

…“The biggest cultural and ­organisational challenge the RBA faces I think is avoiding group-think,” he said.

Mr Lawson also described the huge risks in Chinese imbalances and the dramatic deterioration in Australia’s fiscal position when they correct.

Another senior MB reader!

Houses and Holes
Latest posts by Houses and Holes (see all)


  1. The bureaucracy cannot acknowledge the bubble, because that creates an obligation to do something about it. At some point, the costs of continuing exceed the cost of change. i say this point has already passed.

    Don’t Look Down!

    • It’s also important that the Party politicians wear the blame for this. Nothing can be done other than push private debt further, which they will.

      This is the most important part, that people realise the extent of the betrayal by both the liberal and labor parties.

    • Hi David can you elaborate on what you mean by the costs? Can they be quantified directly as $, or are they more qualitative issues such as depression rates, disinterest in family formation, increasing hatred for specufestors, etc?

      • All of that, Andy. We cannot say x-1 is all right and x+1 is a fail simply using known statistical measures The economic and social cost of inflated land prices resonates around the economy and will have consequences for decades.

        What about the children not born? The builders underemployed because families must spend so much on land? The straitened retirements because work incomes were diverted to interest payments? Measure that.

    • reusachtigeMEMBER

      LOL, this guy posting this comment has been banging on about a crash for years. Don’t listen NOW!

      • Too right, buying at the top has never hurt anyone! My good friends at the banks are happy to lend me the money, just gotta sit on the prop for a while and the Equitymate will roll in once the Chinese buy the whole country.

      • Tony – I dont want to burst your bubble but with the cash rate at historic lows with the potential to fall further in the next 12 – 18mths, this ain’t the top and the top is a ways into the future..

        Buying today is not at the top.

  2. As Glenn Stevens and the Reserve Bank of Australia peruse the wonderful results of extremely low interest rates in Australia, they might want to scrutinise the result in Japan where they’ve had very low interest rates now for 20 years.
    Japan is in an economic depression where the debt levels… encouraged by central bank zero interest rates… are just impossible to support.
    It seems very strange to a non-economist with a science background and proven good common sense that after watching the laboratory rat fail the experiment, you would still go ahead and try the same experiment on yourself.

    Are there any adults left in Canberra with the good sense to sack the RBA and take over the running of this country?

    • sydboy007MEMBER

      The difference between Japan and Australia is they have a falling population.

      When you look at GDP per capita Japan has been doing OK.

      • GDP is negative in Japan.

        Their 10-year bond rate is 0.51%.

        It is now not possible to increase interest rates without bankrupting the Japanese government.

  3. Rally and March in Melbourne on Sunday August 31 @ 1pm, State Library of Victoria. March to Parliament.
    Please Note: Marches / Rallies are being held all over Australia. Please check Website for times and details.

    Design and wording for Placards are now completed. Thanks to those people who made wording suggestions. They were very helpful.
    There are 12 documents available with the Negative Gearing and Housing Affordability theme. These are available to download now in Word Online or PDF form by clicking on the links below. Documents are in A4 size. You can copy them on to a disk or USB stick, take it to Officeworks where they can print them out to any size. I would suggest A2 size, (420 x 594). A1 would be even better but the printing on the blow up would be faded a bit, although this could be darkened up with a black marker pen. You can then stick or tape them on to a stiff backing / placard.
    For anyone who is not able to make their own Placard, we can supply them. Just contact us by email below. You could also print up lots of A4 copies and distribute them as flyers.
    I would urge as many people as possible to get involved. Even downloading these documents and sending them on to friends or whoever will be helpful. Someone may print and distribute a heap of them.

    The type of people at these marches have many different grievances. Probably not many of them know what Negative Gearing is, or how it takes money out of their pockets. We need to convey to them, one major subject at a time, starting with Negative Gearing, and how it is affecting Housing Affordability. By carrying these Placards and distributing these flyers through the marching crowd and the spectators, a lot of them will come away with more knowledge about Negative Gearing. In the next march or rally a lot of them may put down their save the whale, or whatever placards, and pick up Negative Gearing placards.
    We also intend to write a 1 page flyer to explain what Negative Gearing actually is (in as simple terms and hard hitting form as possible) and have this available for distribution.

    Click here for Word Online, which is easier to view.!3640&authkey=!AOC3kMgHMQUtA-s&ithint=folder%2c

    Click below for PDF.!3638&authkey=!AIxJiO7oNjwdTHs&ithint=folder%2c

    [email protected]

  4. It’s interesting now to see the MSM acknowledge the bubble when before it was all about denial. Can’t figure out what’s caused the change of stance?

    Even the Sydney Morning Domain.

    They all act in self interest so there has to be a rational explanation.

    Maybe a recognition that to sustain the FIRE sector, it actually needs to be. ……sustainable?

    • Mining BoganMEMBER

      Well, let’s see here…haven’t a whole bunch of MSM journos lost their jobs? So they’ve had to sell their debt-laden abodes which were, if they believed their own spruik, 95% financed.

      With the cost of housing they can’t afford shelter so they’re bunking on their still-employed journo mates’ couches. The ones mentioning bubbles want prices to drop so they can get the deadbeats away from the remote and the beer fridge.

      Would you want an unemployed journo on your couch?

  5. From that article;

    “Very few RBA executives are recruited from the senior levels of other public sector, academic, or private ­sector organisations, which contrasts with other central banks. While the RBA has served Australia very well, there would be some benefit in appointing more outsiders to senior roles.”

    I don’t think he should worry. The board more than adequately makes up for it with every pro-manufacturing lobby group in the country effectively holding a seat. Hence the all time, emergency low rate bias.

    • +1 the bias to low rates, with CPI at the upper band, and then celebrating land price inflation doing 5-7 years worth in 1, is a terrible failure of the worst kind.

      Hopefully the history books and population give the RBA the credit they deserve since late 90’s, because the system won’t allow it any other way for now.

  6. reusachtigeMEMBER

    LOL, I’ve been hearing about a housing bubble for 10 years or more. I even believed some idiot economist who has continually got an impending crash wrong based on some silly equations that miss every important parameter that is required, including confidence!

    All this is about is confidence and the smart housing investors are extremely confident that government backed housing will always skyrocket. They’ve been right for so long while idiot economists, like that fool who sold his house just before the super-boom, continue to be wrong.


    • Oh how we wish the irony was so. Aust fiat has so much more room to be degraded.

      You are correct.

      • “Aust fiat has so much more room to be degraded”

        That’s the scary part. Lots more real assets to sell to maintain its value.

    • LOL, indeed! Sadly there is truth to what you say. Given governments in Australia generally get voted out if house prices fall, the “smart” investor can be confident that federal and state governments will do everything they can to protect their investments. Whether that is rational or sustainable is a different matter.

      • LOL indeed! I almost spilled my coffee over the keyboard.

        In fact, reusachtige made an important point; namely, a successful economic model needs to incorporate parameters such as a confidence factor. It would be delusional to expect a model that lacks such parameters can model the real economy.

    • “ that fool who sold his house just before the super-boom”

      Ahh Prof Keen. Asked for a debt jubilee and the RBA delivered.
      Be careful what you wish for Prof.

    • ‘There are good times when people have substantial trust and associated feelings that contribute to an environment of confidence. They make decisions spontaneously. They believe instinctively that they will be successful, and they suspend their suspicions. As long as large groups of people remain trusting, people’s somewhat rash, impulsive decision-making is not discovered.’

      Robert Shiller from HnH’s confidence article today.

      Running with the herd always feels safest…..

    • Keens original interpretation of the RR bet expired in October 2013…

      So it looks like he would have walked anyway. Who would have thought??

      No doubt he’s still smarting over his comments of old, as are the poor unfortunates that followed his work.

    • I sold just after Keen sold his and realised a 25% pa gain.Easy money particularly seeing the same property was again on the market less than 12 months ago for a maximum gain of less than 5% after costs and interest. I then bought a distressed acreage in the middle of GFC and am sitting pretty now. By the way, is your sarcasm related to you making some average decisions?

  7. APRA, hopeless.
    On Friday I posted a view on APRA and Bail-ins which look increasingly on the cards:
    So if macroprudential brakes were to be applied so as to limit the banks credit expansion model, would the banks go willingly?
    New Basel III requirements for increased ADI capital holding kicks in Jan 2015. It seems to me that neither the banks nor APRA have any real intention to be responsible in terms of macroprudential reform and are selectively ignoring parts of the BIS agenda that impact it.
    APRA is, in my opinion, derelict in duty. Anyone with either monies in the bank or super funds is at risk thanks to APRA’s actions and lack of action.
    From my Friday post on APRA and Bail-in preparation:
    I am still trying to get my head around this whole Bail-in scenario. I’ve read the nexusmagazine ‘Cyprus Template Bank Deposits at Risk’ article ( and some related BIS & APRA documents plus scanned the Interim Murray Inquiry report.
    Not ‘dragging the taxpayer into the next crisis’ seems code for the government not wanting to fund the bail-in with taxpayer monies. Fair enough. But have main-street savers been adequately warned?
    From the BIS and Basel Framework 2012:
    “APRA acknowledges that the Basel requirement for non-CET1 capital instruments to convert, and for new shares to be issued, prior to any public sector support of a troubled institution, has not been replicated verbatim. This was done deliberately, and within the spirit of the Basel Framework. Public sector capital support for a banking institution is virtually unprecedented in Australia” (not occurred for over a century), “and APRA does not wish to create moral hazard by using language suggesting that such support may be forthcoming for any ADI.”
    Bit late for warning the public of moral hazard after the event. I would have thought, given the banks exposure to offshore debt, currency risks and volume of highly-leveraged Interest-only investor loans on balance sheet, that APRA should be advising consumers on a regular basis of the danger of trusting the banks.
    Other things I find strange in the world of APRA and Basel reqs are:
    1. APRA’s treatment of investment loans – “Approximately one third of Australia’s internationally active ADIs’ residential mortgage exposures are non-owner-occupied mortgages. . . Accordingly the likely potential risk for capital understatement that could result from APRA’s current treatment of non-owner occupied mortgages was considered material.” (see BIS article)
    2. APRA’s treatment of SMSF (and commercial/retail funds) versus Industry super funds (mainly unions). Deposits appear not to be guaranteed in Industry/union super funds. Is this setting up Industry/Union super funds for a fall? (see cuffelinks article ‘APRA helps SMSFs but Large Super Funds Left Hanging’);
    3. In the stress scenarios applied to banks, model cash-flows used were based on flow extremes over the last 24 months. Why did they not use data covering the volatile GFC period if they want to understand what happens in stress situations? You know the answer.
    4. APRA it seems has allowed the effects of currency movements, which are directly impacted by offshore borrowings, to not be factored in calculations.
    1. Regulatory Consistency Assessment Programme (RCAP) – Assessment of Basel III regulations – Australia, March 014
    2. APRA helps SMSFs but large super funds left hanging – By Graham Hand on April 2, 2013

    • ceteris paribus

      I suggest the lack of a Government Guarantee on the cash deposits of superannuation funds in ADI/banks, channeled through a Trustee process, is a huge regulatory oversight, which may leave many conservative superannuant investors highly vulnerable in a crisis.

      • innocent bystander

        hi cb

        ru talking about retail funds or SMFSs with a trustee …
        got a link on that?

      • ceteris paribus

        @ innocent bystander

        I am talking my cash component (mainly in banks I presume) in an industry super fund. I checked with the industry provider and got written advice that I had no Govt guarantee coverage for these cash deposits.

        Now I am not 100% sure so you would need to check- but I would presume that if you had your money in banks under a SMSF, you would have a personal bank account and are probably eligible under the Govt. guarantee.

        As for retail super funds, I would never use them these days- so I don’t know.

        Hope this is of some help in starting your research.

      • innocent bystander

        thanks for that.
        yes, my understanding is retail/industry cash could be at risk, tho there are other APRA safeguards not afforded to SMSFs. For SMSFs the trustee could be personal or corporate and my current understanding is both would be protected by the guarantee.
        fwiw, prior to GFC cash in retail funds was of dubious safety anyway – when I enquired prior to setting up my SMSF cash wasn’t really cash in laymans terms but in cash like managed funds which were vulnerable to redemption freezes during the GFC.

      • ceteris paribus

        Thanks, innocent bystander. You are well ahead of me in these matters.

        I was hoping I could put off the move to an SMSF, since it it is such a fiddly and boring prospect for me in drawdown phase.

        But given the current financial imbalances, associated with big bank positions, I need to look at it.

      • My industry super fund allocated pension has a guarantee of no negative returns therefore it has its own capital guarantee independent of the government.

    • interested party

      On the subject of bail-ins…..I would not be at all surprised to see ‘Housing Bonds’ come to light……along the lines of the ‘War Bonds’ that came to be…..and given the size of the market and the magnitude of the possible losses to many in Government, the ‘housing bonds’ would be shoved through as a national emergency action. Your super will be required to hold x% of these bonds.

      • Sounds most likely – ‘Housing Bonds’ or some kind of ‘Infrastructure Bond’ that cannot be cashed, if ever, until retirement. Probably end up as some kind of supplementary income stream to pension.
        Either way, reading what is happening APRA on behalf of BIS is really doing a good job of stitching up the Bail-in regs in favour or RBA, govt and banks.
        Not one of those? too bad, so sad.

      • IP…absolutely correct. In the ‘old’ days Superr funds had to hold a % of their assets in government bonds (or cash?) So there is plenty of precedent.

        P.S. My memory isa telling me 30% bbut I’m oppen to correction. However it certainly was a significant percentage of the fund.

    • All I have heard about bail ins is that bondholders would take the hit instead of taxpayers, which is as it should be. No-one seems to be advocating for Cyprus-like stupidity.

      This would raise the yield bondholders demand, but I don’t think it’s unreasonable that bondholders should have to look at the reliability of the bank they lend to.

      If anyone starts talking about putting depositors on the hook, then they will probably demand higher interest rates or the relatively higher risk of equities doesn’t seem like such a jump any more.

  8. I think some economists probably underestimated the determination and stubbornness of politicians of ALL persuasions (even the good guys like Nick Xenophon) to keep land prices rising.

    It’s so easy to keep saying “these prices aren’t sustainable” but no one actually knows. The rate of growth isn’t sustainable, but current prices probably are, dependent mainly on unemployment & IR.

    • ‘The rate of growth isn’t sustainable, but current prices probably are….’

      Only if you see housing cannibalising the rest of the economy as a good thing.

    • It’s so easy to keep saying “these prices aren’t sustainable” but no one actually knows.

      Those statements are backed by models and knowledge from what has happened and if you’re thinking, no we are different, have a good read of this…

      Explains relatively clearly why we were different.

      The rate of growth isn’t sustainable, but current prices probably are, dependent mainly on unemployment & IR.

      If the rate of growth isn’t sustainable, then neither are prices because our housing investment model is based on capital gains. To bring it back to a yield based model, we are currently 20-30 % over priced. With more normalised interest rates, probably closer to 40%.

  9. Aus houses were 20-30% overpriced last year.

    Aus house prices have increased by over 10% this year.

  10. I’ve been reading about this imminent housing price crash since 2008.

    “Any day now …”

    “Slow melt …”

    “Listen to that guru, Steve Keen … ”

    You lot need to learn the difference between what you would like to see happen and what is likely to happen.
    Just as well you aren’t financial advisors. Your clients would lose a heap of money and you’d have your tits sued off.

    • By likely you mean “property doubles every 7-10 years” instead of any other reasonable valuation metric?

      • If supply restrictions are lifted and if demand supports like FHOG and negative gearing are ended and if interest rates rise a lot and if the brakes are put on foreign investment in housing and if immigration stops then we might see some downwards action on prices.

        But that’s a lot of ifs and right now not a single one of those things is happening. In fact not a single person who can do anything about them is even talking about doing anything about them, much less actually doing anything.

        There’s a lot more reason to think the future will look like the past than to think that it won’t.

      • Fair call @Acme. Do you see these things as a sustaining of this abomination, or growing it further?

      • The underlying driver is population growth. If the population keeps going up in a restricted supply, assisted demand environment then prices will continue to trend up.

        If we want to as a society we could bring prices down tomorrow. But we don’t.

      • “But we don’t.”

        Absolutely! The devastation will be something to be seen to be believed. Think ‘dictatorship’ in the final throes.

        Yet the longer we leave it the worse it will be.

    • This is a high-stakes game. The bulls need to be right every time. The ‘bears’ only need to be right once.

      • The problem with listening to the bears is that by the time they are right, you might be dead, and you’ve lost a truckload of dough listening to them while you were alive.

      • Rubbish. You make it sound like there is no other way to be wealthy than to invest in real estate. Even if prices never fall in real terms, I’ll still be better off renting. Not just financially, I’ll also be able to sleep at night.

        If you want your financial security to be dependent on borrowing heavily on an undiversified, illiquid asset that produces very low (sometimes negative) yields, go right ahead.

      • Sure. Nothing wrong with renting and investing in shares and bonds, if that suits you. But most people will have some property in their portfolio for the diversification benefits.

    • Yes, UNDERESTIMATED the lack of moral backbone of politicians, federal re ‘up to their necks in it’ and ‘votes buy the feel good factor’ of price inflation along of course with pandering to the moral corruption of bankers and their loose lending routines.
      State polies and their personal fortunes orchestrating land restrictions and upfront fees all bringing in state revenue to buy votes with.
      We could not expect more of course from the commercial press and tv, REAgents and of course the big mouths of property VI”s.
      Yes very much overestimated their ethics and underestimated their deviant behaviour

      • steve99 OIt’s not just the politicians. It’s also the bamkers et al etc etc
        However it is also ‘us’ Even those who contribute in tehse pages want the fairy tale ending….it will be all corrected and houses affordable for families again….but there will be no cost or dislocation.

        It’s not going to be like that and I’ll be London to a brick that most of those now calling for the housing correction etc will be in the vanguard of calling for the heads of whoever precipitates the problem.

  11. “ conditions have probably been too loose”

    12 mnths of all time record low negative real interest rates, probably too loose! Noooo. Yathink?

    But we need to debase the currency it’s the only way we’ll get competitive. Surely there’s no downside to that?

    • …..unless you are a ban sitting looking at lots of global wholesale borrowings balanced out against long term mortgages prices in AUD on overpriced Australian real estate priced in AUD.

      • or
        unless you are an owner (read the average Super Fund which hold pretty much 100% of people’s savings) of all those shopping centres that are virtual deserts as nobody can anymore afford the super-expensive stuff from China and Japan
        unless you own a car dealership
        unless you own a house with debt
        unless you own a business selling consumer goods or a warehouse housng a business that sells consuumer goods
        unless you are a tax[payer whose taxes will rocket trying to support bloated government and regulation
        etc etc