Only in Australia: Captain Bubbles to advise on housing affordability

By Leith van Onselen

Australian policy making continues to resemble a parody, the latest example of which is former RBA governor Glenn Stevens’ appointment to a NSW working group on housing affordability. From the Daily Telegraph:

Former Reserve Bank governor Glenn Stevens will advise a state government working group on how best to tackle housing affordability…

Today, Ms Berejiklian said work had begun on a “comprehensive strategy” and announced Mr Stevens, who recently retired from the RBA, had accepted an invitation to provide advice.

The Premier dodged an Opposition question, however, about whether she would consider advocating for changes to negative gearing if that were recommended by Mr Stevens.

Let’s recall Glenn Stevens recent record. Post-GFC he jacked interest rates into the mining boom and helped deleverage the economy, warning of excessive leverage in households. But he over-egged the mining boom and when it suddenly began to crash in 2012, the same Glenn Stevens juiced housing to the gills to cover his own misreading of the mining boom’s durability, in turn playing a direct hand in the housing affordability challenge Sydneysiders confront today. Even as that bubble grew to histrionic proportions, and specufesters took over the market, Stevens steadfastly refused to countenance macroprudential tightening to bring the madness to an end.

The RBA’s speeches and commentary around housing often felt like they had come directly out of a bank’s economics/marketing department, aimed squarely at appeasing foreign bond investors and boosting confidence, rather than telling it as it is.

For years we heard from the Stevens RBA that: Australian housing is not particularly overvalued; the banks’ lending standards are sound, financial regulation is the best in the world, and macro-prudential policies are not required (despite the shift globally to such rules and the RBA’s own research showing they work); the banks’ massive external liabilities do not pose a problem and might even be desirable; and the potential headwinds facing the economy are mild.

Sure, the RBA and APRA recently backtracked somewhat on macro-prudential, implementing a timid 10% ‘speed limit’ on investor mortgage growth in 2015. But this came long after the horse had already bolted and was way too generous given the weak growth in nominal GDP.

Don’t get me wrong. I don’t hold the RBA fully responsible for what has transpired in Australian housing markets. The fact is, politicians at all levels have abandoned clear-thinking economics to manage the market failure around housing, from state/local government urban containment, to federal government maintaining demand-pumping tax lurks (e.g. negative gearing and the CGT discount) and at at various times first home vendor grants.

Nevertheless, by refusing to speak-out, Stevens’ RBA effectively gave Australia’s politicians a free pass on housing.

One of the few times that Captain Glenn did speak openly was in June 2010 when he issued the following warning about Australia’s then record high household debt:

Reserve Bank governor Glenn Stevens is urging Australians to reduce household debt and increase savings, while the economy remains strong and the risk of financial hardships are low.

In a speech given in Sydney, Mr Stevens said the European sovereign debt crisis carried a lesson for Australians that “potential vulnerabilities need to be addressed in good times, even when markets are not signalling unease”.

“One would have to think that, however well households have coped with the events of recent years, further big increases in indebtedness could increase their vulnerability to shocks – such as a fall in income – to a greater extent than would be prudent.”

Nearly seven years later we have or have recently had the following:

  • Record high housing valuations;
  • Record high household debt;
  • Record high investor participation;
  • Deteriorating lending standards; and
  • A budding apartment and oversupply.

History should (but probably won’t) assess Glenn Stevens’ tenure as a failure. He let the dumbest bubble in history inflate to another all-time high just as national income slumped and the economy faces its biggest structural adjustment since the early-1990s recession.

And now he has been appointed to advise the NSW Government on Sydney housing affordability.

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    • Yep. Now I’ve seen it all.

      I expect the typical dick move from Glenn. Making al the right noises but only after he’s no longer in a position that matters. Selfish attempts at rewriting history and creating a positive legacy.

      Murray – done it
      Hockey – done it
      Stevens – next

    • I think it’s very believable. I’d be shocked if they appointed anybody different. Glen is part of the elite, the entitled leaders of our country. A good old boy who can be relied upon to maintain the status quo and not upset the apple cart. Look after the government’s donors and ensure the premier is re-elected.

      Who else would they appoint? One of those annoying professors that keep spouting facts and statistics? An advocate for change? Of course not.

      It reminds me of the documentary movie Inside Job, the same names and individuals moving between government departments and regulators. Always the same bunch all looking out for one another – no regard for ordinary people. Just like this aristocracy of old Europe.

    • Was my first reaction until I saw the CGT proposal on the other thread. Suspect he may support this given RBA affordability policy submission suggested the CGT/NG interaction was a major problem.

  1. Housing affordability is so difficult to work out wrt what do we mean? I know all the arguments & Oz housing should have collapsed in price yonks ago, but FFS I wish I’d bought a Sydney property even 1-5 years ago, when then every man & his dog on MB (except beautiful people…!) were saying its gonna blow. Well blow it has but just not the direction everyone said. I wish I’d bought! To be honest I doubt that the elites & politicians will even allow a collapse, so maybe property is a one way bet?

    • Being artificially supported by government props from corrupt politicians and their mates, the property losses could happen at any time from a shock out of the blue such as with a change of leader and policy, or even with Trump pushing up inflation.

      If you really want to buy into that, i suggest an equally risky but easier way to make a mint is to set up a meth lab and make a $mil and close down before the cops find out 😉

      • If you can service the loan with rates rises inflation would be great to erode the debt.

        I think parts of Sydney are horrendously overpriced and on the harbor fairly priced when compared to other western countries. There’s always going to be elites paying huge prices but all of Sydney (Liverpool to Glebe to Point Piper) think they’re elite. You don’t see that anywhere else in the world.

        Draw a line around the genuine elite areas and eliminate them from the data. They’re meaningless in every city and major regional town along the coast.

    • Sool, yep, what do we even mean by housing affordability?
      I think it will be construed as a new supply problem, and making that new supply somehow more affordable.
      It sure as sh*t isn’t going to mean talk of existing owners taking a haircut.

  2. ceteris paribusMEMBER

    Housing Affordability? Affordability? Glenn has been playing on precisely the opposite team.

    • beat me to the punch. ‘manage the market failure around housing’? if they considered this a failure, they’d do something different. this is exactly what they want. the only losers are normal Australians and fuck them anyway for being stupid enough to vote this lot in. can’t afford homes? country being sold to China? well, thats darwinism at work you idiots.

    • “Former Reserve Bank governor Glenn Stevens will advise a state government working group on how best to tackle housing affordability…”

      If Yes Minister is be believed, the title given is to get rid of the difficult bit, so that the rest need not concern itself with that. In this way it is possible to be seen to do something, while giving out jobs for the boys.

      Although I am not sure the above would not apply in this case. For “tackling housing affordability” does not necessarily mean that there is any desire to actually make housing more affordable.

      • if you want to ‘tackle housing affordability’ but still want to blow the bubble bigger, theres only one man to call!

  3. Stevens, like other RBA people, did make some intelligent comments about housing supply and urban planning in his time. The only hope I still hold out, is that Stevens will be clear on this in his new role.

    Most of the arguments against macro-prudential, tax reform, immigration control, etc actually were received wisdom for decades BECAUSE housing supply was elastic enough that the demand-side factors never swamped it. There is a kind of “binary” effect involved.

    I oppose those who are calling for one or more demand-side controls as “the solution to housing affordability”, without fixing the supply side. There is no “solution to housing affordability” available among the demand-side reforms only. And none of them are essential should supply be freed of its distortions. In fact there are benefits foregone, in many cases.

    • Phil. We need both demand and supply-side reforms. Only focusing on the supply-side will fail as well. Just look at the National Government in NZ. A complete failure on housing despite trying to boost supply.

      • National have not been serious, or possibly have been very ignorant, about the way in which they have proceeded. 8 years later, Auckland still has an urban growth boundary. So don’t tell me National have been doing the right thing on housing supply. Plenty of advocates have been right all along on this, Hugh Pavletich foremost. Don Brash was clear long ago and it was a tragedy National did not come to office with him as leader.

        I would agree with reforms of “everything” as a temporary measure in the face of a bubble with built-up pressures, but once supply of land is not distorted by regulatory interference, and this is an accepted norm and the industry is working accordingly, pretty much all the demand-side restrictions could be repealed harmlessly.

        I have no problem with tax incentives for the provision of rental housing in a market where it is impossible to goose house prices. I have no problem with good quality immigration of whatever numbers, when housing and infrastructure are supplied on an economy-of-scale basis and funded properly, with growth paying for itself. Growth is always more “fundable” than house prices several hundred thousand dollars too high, and has value for money. I have no problem with modest capital gains being untaxed, and “modest” is the term that has applied throughout the historically normal median-multiple-3 house price era. CGT’s need to be intelligently targeted according to the magnitude of the gains, not according to the asset class, just because it is X or Y type of asset. The taxed gains should also be “net of inflation”, and on realised gains only. I have little problem with low interest rates when this enables households to pay off a constant house price faster, and even enables development and infrastructure to be done cheaper.

        The whole issue can be far more clearly analysed as urban land price movements rather than “house prices”. Urban land prices have inflated 20 or 30 fold when house prices have merely “doubled” or tripled. Having the right supply-side regulatory regime is massively effective seeing it demonstrably forestalls inflations of this magnitude. It is not just a nice incremental linear matter of CGT’s avoiding 10%, reduced population growth avoiding another 10%, abolished NG avoiding another 20% and supply side reforms avoiding another 20%. The equation is actually a binary one with the supply side being the on/off trigger for land price inflations of hundreds or thousands of percent. All the other stuff provably does not cause inflation otherwise, or where there is inflation due to supply inelasticity, demand-side tinkering is impossible to show as responsible for net benefit of many percentage points. There are always negative distortions as well as the intended “fix”. For example, rental housing could become scarce; market turnover and churn and co-location efficiencies could be reduced; and just as many people remain locked out of home ownership with ability to save towards a still-monstrous house price replacing the ability to obtain credit.

      • Phil. I agree with everything you say about supply. But do you honestly believe that NZ or Aus will ever implement Texas-style land-use? I have more likelihood of becoming the lead singer of Pearl Jam.

        Rather than waiting for the never-never, how about taking a broad-range of measures – both demand and supply-side – that can alleviate the situation in both the short and longer terms.

        Don’t let perfect (but unrealistic) be the enemy of good (but achievable).

      • The curious thing is that NZ, and Australia, and Canada, and France, and quite a few other countries, had decades of median-multiple-3 housing markets without being “Texas style” about it. In fact many of the States in the USA that are not Texas, have affordable housing without being directly comparable on how they do it.

        I think that the difference here is that government at all levels was once pro-urban-growth as a matter of faith, and this has flipped to them being veto-ers and rationers, at least at the local level where it matters the most. I think that government could be an enabler of competitive land supply without having to stand back, TX-style and allow the private sector to do it.

        But I share your pessimism, for the underlying reason that the voting public is completely deceived and propagandised on the evils of “urban sprawl”.

      • “The curious thing is that NZ, and Australia, and Canada, and France, and quite a few other countries, had decades of median-multiple-3 housing markets without being “Texas style” about it”.

        Yeah because they had credit rationing.

  4. No surprise, just another example of The Great Subtle Australian Corruption.

    Upper regions of business and politics is just a merry-go-round of footy/school/netball mates. When you’ve got less than 10 decent size businesses and 2 political parties the incrowd becomes rather crowded.

    No one up there interested in changing the status quo I can tell you. If only a new party would be willing to put systemic reform (multi-party democracy) on the table…

  5. 500 words and no mention of Stevens real crime.
    Stevens cut rates to record lows in the middle the biggest housing bubble this country has ever seen
    Stevens was warned 3yrs ago if he cut rates to record lows, mortgage debt and house prices would dangerously inflate.
    Stevens then cut rates to record lows for 3yrs
    That is his crime

    • Technically, isn’t that APRA’s crime?

      Stevens had one lever to pull for the entire economy, he pulled it. If APRA don’t want to regulate mortgage lending, what can the RBA do?
      Perhaps he could have been more vocal, but that’s about it.

      • Not convincing. How many times did we hear from Glenny: “If ARPA does not control this shite, I will have to pause/delay the cuts, to the detriment of whole economy. So ARPA, do the right thing, or else will be your fault.”

        Didn’t think so.

      • “If APRA don’t want to regulate mortgage lending, what can the RBA do?”
        The RBA can (and should) then choose not to cut the rates to record lows
        To cut to record lows in those circumstances was criminally negligent
        Stevens should be held accountable

      • He should have looked at inflation with house prices included. Doing so would have led to the necessity of hiking rates. Then he could force the rest of the government attacking that part of the inflation basket.

      • ‘APRA’ is a massive scam. and a effective one. What other country has an ‘APRA’? its just a bullshit title for saying the RBA is blowing a bubble and wants to be absolved from blame. in that, APRA works just as it was always designed to.

  6. I just dunno about all the talk of adding ‘supply’. It seems that whatever new stock is added is going to be a poor cousin to older stock. Existing ‘houses’ are nearest to public transport, infrastructure, the CBD, cultural interests, whatever etc.
    New stock is not as well built, is going to be on much smaller plots, is going to be miles out from the centre of our highly centralised cities, is not going to be ‘leafy’, is going to have poor transport choices. The only new supply that gets around these is an apartment. Otherwise we need the commensurate infrastructure to be built along with the new stock – and of course that is an abysmal fail in this country.

    So any new builds just make the older builds more attractive and their prices get pushed up anyway.
    I think ‘supply’ talk is a tactic used by politicians so that they can avoid talking about ‘demand’.
    Talking about demand would mean unpacking the whole can of worms: immigration, speculator demand and the attendant tax incentives, demand from foreigners, land banking.

    • Does it matter? He doesn’t really need the money – I’m sure he has enough by now.
      He would be doing it because it interests him I would think

  7. Jumping jack flash

    The affordability problem is easily solved, while keeping existing housing stock prices high so as to not disturb the trillions of dollars of debt secured against them.

    Capt. Glen just has to look to the UK, and improve on their lacklustre strategy. The intent was correct – build affordable slum housing, but the execution was flawed – they made them too desirable, so they inflated in price along with the rest.

    Solve the problems with the execution, and he’ll be able to proclaim success.

    The affordable houses have to be so undesirable that the average first home buyer, and renter, for that matter, should look at them and say, “no way I’m living in that s#hole”.

    Then it becomes purely a matter of aspiration and entitlement.

  8. MediocritasMEMBER

    I love the way these clowns love to say “diversity is our strength” whilst simultaneously destroying the diversity of the economy and talking about how strong the economy is.

    Which one is it dickheads?

    • they did a 15% luxury real estate sales tax (they don’t actually want to sell Canada to China. we don’t care. learn some mandarin)

    • superior cultures are working out what works for their people. we’ll be a taiwan-HK type state soon enough

  9. Jean Claude Brandan

    I suppose by ‘housing affordability’ Ms Berejiklian means ‘house price inflation’.

  10. Stevens appointment makes the Gallipoli story so much easier to understand. The British commanders made many mistakes and were mostly incompetent. Competence is no prerequisite for command,