From Chris Joye today:
Sitting in a palatial Sydney office with a senior executive from one of Australia’s biggest banks, my eyes burst open wide in surprise as he blindsides me with his solution to the sunburnt country’s burgeoning housing bubble.
“The Reserve Bank should simply bite the bullet and lift interest rates by 25 basis points to send a shot across the bows of borrowers to remind them that the lowest home loan costs in history cannot stay with us forever,” the banker says.
He adds that “none of our business borrowers are complaining about interest rates right now – it is one of the lowest priorities when we survey them”. The same observation applies to his residential mortgage customers, who the banker worries presume that the abnormally rapid 7 per cent annual capital appreciation over the past three decades will persist into the future.
“House price growth in the years ahead will likely be much lower,” he says, trotting out the well-documented one-off events that conspired to boost local home values over the 1990s and 2000s. These include the rise of two-income families, the dramatic decline in mortgage rates with on the back of benign inflation in the mid 1990s, and a huge increase in household leverage.
In normal circumstances, this would be a no-brainer. The problem is that times are far from normal. A rate hike (or two if slowing housing is your goal) will do the following:
- stall the only sector in the economy with any momentum (see today’s construction PMI)
- sink consumer confidence
- reverse falls in the dollar
- plunge Australia into domestic if not outright recession within six months as the income and capex shocks associated with the terms of trade bust flatten everything
To be honest, I’m not sure the outcome will be any better with macroprudential given it’s been left on the shelf far too long but it’s worth a try given it will further pressure the currency. If house price growth can be slowed to similar levels as income growth using mortgage caps then rates can be cut again if prices begin to fall and there is some hope of another soft landing…
