More confusion today from Rob Burgess:
Those hoping for a property market slump next year to allow them to ‘get into the market’ need to be careful what they wish for.
Some may be offering little prayers to the god of the real estate sector, Mammon, that the slowdown in Sydney house prices in last week’s CoreLogic survey will spread and become a full-scale rout.
But before turning your rental lease into a burnt offering, remember this: lower houses prices, matched by sharp declines in hours worked or by the loss of employment altogether, won’t improve things a bit.
…Growth is fragile, and there is no sign yet of wage inflation starting to chip away at the nation’s huge stock of private debt.
The ANZ job ads survey, released on Monday, showed the number of ads rising 13 per cent in the past year, but ABS data shows total average earnings grew a measly 1.6 per cent – less than inflation.
…So if wages can’t even begin to catch up with house prices, surely a big property crash is the way to bring things back into balance?
Well, not really. Seven years ago when this columnist joined Professor Steve Keen’s historic ‘Debt March’ from Canberra to Mount Kosciusko, a major price correction seemed like a painful, but not catastrophic way forward.
Yes, it may be hard to believe, but even back then the growing gulf between wages and house prices was worrying – and Professor Keen was way ahead of the pack in diagnosing Australia’s growing debt problem.
Since that time, the combination of wage increases and population growth have made the nation’s collective pay-pack 34 per cent bigger, but the mortgages those wages are servicing are 97 per cent bigger.
The Reserve Bank, which helped inflate that debt bubble, is now virtually sidelined. It can’t cut interest rates for fear of blowing the bubble bigger, and can’t raise them for fear of bringing the whole house of cards tumbling down.
In that context, wishing for a house price crash is like dreaming of economic hara-kiri.
Not only would plummeting house prices ravage consumer confidence and consumption spending, but they would hurt hundreds of thousands of small businesses who unofficially use their home mortgages as a backdoor way to finance their businesses.
For a guy that purports to be against the bubble, Burgess sure likes to hedge his bets. In truth, this is just thinly sliced analysis.
MB has for a long time aimed to bring macroprudential to bear on the housing market to prevent the bubble from growing as interest rates inevitably cratered in the post-mining boom era. One of the reasons for that was to aim for a “slow melt” in prices. We succeeded but far too late to be helpful and so the bubble is now at calamitous proportions.
In asking how it should be deflated now, as it must, we need to go much deeper. First, we need a base case for the prospects of the bubble over a five year time frame:
- China is going to slow and Australia’s terms of trade revert to mean;
- this will denude the economy of much more income yet;
- interest rates are almost exhausted and will be entirely so at the end of the process;
- fiscal policy has some spare capacity but its use in a crisis will be inhibited by the need to prevent downgrades from triggering rises in bank funding costs;
- Labor is going to remove negative gearing and capital gains tax benefits in 2019;
- mass immigration is clearly disrupting the political economy and at some point will be cut, and
- the global business cycle is aged and likely to have an accident.
This base case says to me that house prices are going to fall in the next five years no matter what we do. Probably quite a long way. So, the question is not what should we pray for but how should we handle it?
Given the last leg of the bubble was blown in a vain attempt to see off the post-mining boom adjustment, we’ll need to go back to that adjustment. That is, to dramatically improve Australia’s real exchange rate and that will mean:
- productivity directed reform;
- budget repair;
- competitiveness reform;
- more falling wages, and
- a lower currency.
This is a structural adjustment that we keep trying to delay using cyclical policy levers. If we keep pushing back the process in this fashion then, as the above list of house price risks identifies, sooner rather than later it will all happen at once in a crisis.
We should certainly aim to mitigate fallout from falling house prices, to avoid the worst of any debt crisis, but price falls will be a part of this adjustment whether we like it or not and they can’t begin soon enough.
