When regulators launched macroprudential 2.0 a few weeks ago I wrote:
To understand what they’re about, we can turn to a similar historical period. In 2003 the RBA confronted a relatively weak economy following the dot-com bust but a runaway property bubble in Sydney.
To combat it, the then Macfarlane RBA set about popping the bubble without crashing the economy by launching a major jawboning assault on investors combined with a couple of short and sharp rate hikes. They succeeded in doing a lot more damage to sentiment than they did actual monetary tightening which helped mitigate the fallout.
Significantly, this approach was based upon research by a junior governor name Phil Lowe, who had several years earlier penned BIS research arguing that bubbles ought to be dealt with up front, not afterwards, as was the orthodoxy under Alan Greenspan.
Contrast that with today and I think we can see the same methodology being employed by the Council of Financial Regulators. In the past few days we have had ASIC, the RBA and APRA all jawboning their butts off about the bubble, about household debt and about dodgy lending. They have also tightened macroprudential across a a number of metrics. All three are at it again today.
The RBA thinks that the worst of the mining bust is behind us so now is as good a time as any to blow the froth off the bubble. Moreover, these guys do not innovate, they go by an established play book. And given the 2003 Sydney bust had its victims but was manageable overall they will reason that it can be done again without crashing the system. Especially so as long as immigration continues to run hot and the global economy to improve.
This campaign has continued since with the regulators and Treasurer reminding specefestors regularly that the jig is up.
In 2003 it took similar jawboning and two rates hikes to drive home the message that the boom would no longer be tolerated. Since March we’ve seen specufestor mortgage rates jacked up 25bps:
Now in May we’ve also seen a big hit on interest-only lending rates which we can probably say represents another rate hike in psychological (if not actual) terms.
So, it might be argued that we’ve had our two rate hikes this time as well. The only leading indicator that we have in Australian mortgages is tumbling:
This time last year, the index was at 135 and accelerating. It is now at roughly 115 and tanking. The 20 point year on year fall is now bigger than the impact we saw from the first round of macroprudential which took house price growth close to zero.
Plus, there is a series of further disappointments ahead:
- first quarter GDP is very likely going to shrink;
- China is slowing and iron ore plus the terms of trade are going to crash for the entire year, denuding income from the economy and sapping confidence as the Budget outlook disintegrates, and
- the ASX has topped out.
The big disappointment is that the Budget is a housing stimulus bust. The FHB measures are no more than what Labor previously had in place. The foreign buyer measures will probably crimp demand at the margin. Supply measures are modest but they are there. Probably most important is the bank tax which will likely hike mortgage rates again soon:
UBS analyst Jonathan Mott warned the $6.2bn bank levy could hurt growth if lenders resorted to passing on costs to customers.
He said the introduction of the levy is likely to prompt the sector to hike mortgage rates, adding further pressure to the economy as regulators force the banks to move borrowers to principle and interest loans, rather than riskier interest-only loans.
“Any additional repricing by the banks will further pressure household cash flows at a time of near record low income growth and rising electricity bills,” Mr Mott said. “The implications of these changes on the ‘animal spirits’ in the housing market are difficult to predict.”
On the positive side, the infrastructure stimulus will be well-received, immigration is untouched for now and the negative gearing reforms were modest. On balance, however, the Budget is house price negative versus yesterday.
We are close to prices rolling over.
He is also a former gold trader and economic commentator at The Sydney Morning Herald, The Age, the ABC and Business Spectator. He is the co-author of The Great Crash of 2008 with Ross Garnaut and was the editor of the second Garnaut Climate Change Review.
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