Why the RBA will try to save house prices

Don’t mistake RBA governor Phil Lowe for a house price bear as the AFR is doing:

The message for property investors: this is the housing downturn we had to have. Prior to the recent declines, price growth had outpaced incomes for quite some years, accompanied by a steep increase in credit.

“I was quite worried about that,” Lowe said.

To address that over-extension of prices and borrowing, “I think we do need a period of moderate house prices or some declines,” he added. And if we are going to have falling house prices, better now when Aussie and global growth is robust and everyone has jobs, he said.

This of course means any property investors hoping that the RBA might save their bacon with a rate cut shouldn’t hold their breath.

Lowe also said house prices matter only as much as they potentially affect consumption, and therefore feed into forecasts for the things the RBA officially targets: inflation and unemployment.

The clear implication is that while the central bank has never hiked when house prices are falling, that’s not to say they couldn’t.

Garbage. Falling house prices have always triggered monetary easing in Australia and always will. Chart from UBS:

Note that rate easing cycles have always kicked in after house price falls of more than -5%. As well, see the run-up in household debt post-2012 on the left hand chart. That was after Glenn Stevens warned in 2010 that if household debt went any higher it would be dangerous. Phil Lowe was his deputy. Good one guys.

This is also why Phil Lowe holds the line on mass immigration. He’s not so stupid as to think that the permanent supply side shock it delivers the labour market isn’t sitting on wages. His criticisms of low wages growth are just virtue signalling. What this is really about is keeping the RBA’s pet property bubble aloft. Phil Lowe knows that if the immigration rate is halved then it’ll turn into a lead balloon.

Whatever it takes for the bubble and wages be damned is the RBA’s secret credo.

All of this is important for the housing investor because it says that the RBA is no more nor less hawkish on house prices today than it ever has been previously. It is the market itself that will determine RBA action not the other way around. If house price fall much further then consumption will too, unemployment rise and rates be cut. Ipso facto.

What the housing investor needs to ask today is not whether the RBA is friend or enemy, it is always friend, it is whether the RBA (and the other house price bazookas) has any bullets left to fire.

That’s where things get uncomfortable. The RBA only has a few cuts left and half of them will be kept by the banks so there is bugger all support there. Worse, there’s the:

  • interest-only reset;
  • retrenching foreign buyers;
  • a certain Labor victory delivering negative gearing reform;
  • rising bank funding costs;
  • intense pressure to cut immigration;
  • a mature cycle that’s going to bust some time soon, and
  • a stretched Budget that will not be able to deliver a repeat of GFC stimulus (though some will be forthcoming).

The RBA is nearly out of bullets just as the array of threats is ominous. I have no doubt that the kitchen sink will be thrown at house prices when the time comes. That will probably include the RBA launching quantitative easing. But it will only be enough for a temporary price reprieve as mortgage rates bottom out permanently.

Investors should forget Phil Lowe and focus on the architecture that produced the Aussie housing bubble. It is badly dated, its engineering supports fatally corroded, and the earth is quaking.

Phil Lowe is not a problem for the housing investor. Everything else is.

David Llewellyn-Smith
Latest posts by David Llewellyn-Smith (see all)

Comments

  1. The RBA will try to save house prices because most of the board own multiple properties themselves. Some even come from the property industry.

    The RBA reeks of corruption, yet there is no requirement for board members to disclose their assets, like MPs.

    The RBA is yet another bank in Australia that deserves to be called before the royal commission.

    • keynes was wrong, they can’t smooth the natural economic cycle. The market will reverse, the best they can hope for is to delay the inevitable in order to exit their real estate positions (not that they’re smart enough to do so anyway).

      • Correct. Central Bank intervention has led to ever bigger bubbles being blown on the ashes of the prior one — that game cannot go on forever. We are close to the end of this gig.

      • Agree totally. The fact that Australia has gone without a recession for over 20 years doesn’t mean it’s some great achievement. It just means that we have the most distorted out-of-whack economy ever.

  2. Phil Lowe’s greatest RBA hit:

    https://www.youtube.com/watch?v=RLQeb5NGt3E

    I’m turning Japanese, I think I’m turning Japanese, I really think so
    Turning Japanese, I think I’m turning Japanese, I really think so
    I’m turning Japanese, I think I’m turning Japanese, I really think so
    Turning Japanese, I think I’m turning Japanese, I really think so

  3. Great piece HnH, I think we are in total alignment, except that you think the monster is too big to bail, and I don’t

    You do talk about a “temporary price reprieve” – could you explain what you mean by temporary? If it’s something like 4-5 years, I’d count it as effectively permanent (as that is plenty of time for other bubble-supports to be built)

    • Yup! As you, I and a couple of others have opined – this housing bubble is RBA policy.
      There is another aspect. It seems very likely that the holding down of inflation by the liquidation process might be nearing its end. It will continue a little while but a few more majors to fall and it’s all over red rover. However trhe RBA WILL ‘look through’ even until it runs rampant. The RBA has no other option except this housing/immigration bubble. It’s too late to change. They have gone ‘all in”
      Today’s nominal prices may be very cheap. The nominal price of housing going down in a big way is no one-way bet.

      • What do you mean, exactly “holding down of inflation by the liquidation process”.

        In any case, the RBA is set to do all sorts of heroic look-throughs. They’ll are like super man with x-ray vision …. reinforced concrete wall, 2m thick? No problem for the rba!

      • Hey we’re the RBA, we target “inflation” (just not inflation of asset prices, including prices of houses, you know, those things you need to live in).

    • I’d say you over-estimate the powers and competency of our tin pot elites, Peachy. Though I’d say it is possible that order may be preserved in AUD terms perhaps.

      • AUD terms is what matters, matey.

        To people living in the real world, that is.

        A crash from USD900k to USD500k will be pretty laughable if the nominal price of the house is still $1.2m.

        In fact, the average woman is even more screwed – her AUD wage still doesn’t buy any more house, but now also struggles harder to buy petrol, clothes, homewares (everything imported).

        If that’s the “crash” you (and you all) have faith in, I’d prefer a different religion.

      • “”In fact, the average woman is even more screwed – her AUD wage still doesn’t buy any more house, but now also struggles harder to buy petrol, clothes, homewares (everything imported).””

        Excuse me? What about the average man!?
        Is your statement based on the mythical pay gap?
        Can you show me any profession/job in Australia where men are paid more for doing the same amount of work for the same amount of hours in the same position?

        Despite Feminism and “equality”; men also have the additional burden of STILL being expected to be “good providers” because a woman’s money is her money and her partner’s money is her money too.

      • That’s right, it does, McPaddy. I don’t need a $100m postal survey or even an ABS census to tell me what currency most people (and in particular, the housing have-nots, who also happen to be international-asset-portfolio have-nots) derive their earnings in.

        Yeah?

      • “A crash from USD900k to USD500k will be pretty laughable if the nominal price of the house is still $1.2m.

        In fact, the average woman is even more screwed – her AUD wage still doesn’t buy any more house, but now also struggles harder to buy petrol, clothes, homewares (everything imported)”

        The answer is that there is simply no way that nominal Australian dollar house prices will be maintained if the greater fools relied on to pump the prices up have less and less money to put towards a deposit and payments.

      • In a world where good sense reigned, yes kodiak. But this is Australia, where only affordability matters, not price.

    • The last can kick lasted less than 2 years, 15/16 to 17. Conditions have only gotten worse.

      • +1

        That point is often missed. The market has actually been pretty weak for a few years now – Sydney house prices fell over each month 50% of the time in the last three years.

      • Oh and now that u see the effect the last ‘can kick’ had on prices if the intent was to only arrest a decline in prices (as opposed to starting a new boom) would this mean they only require a small ‘can kick’? Yet everyone here believes the govt is out of ammo?

      • Have you gone full retard? House prices could have gone up 1000%, I still ain’t buying. I’m not in the game of speculating on house prices during a bubble, I leave that to less creative folk.


      • And what was the effect on prices during that last can kick from 15/16 to 17?Are prices now cheaper than prior to 15/16? Or more expensive?

        In the context of the point being made what’s more relevant is how much did prices go up in the 16/17 boom bottom to top compared to the previous boom.
        Here you are (using ABS):
        March ’16 to June ’17 – 17% increase in Sydney
        September ’12 to September ’15 – 34% increase in Sydney

      • The other question is when you go to a barbecue, and see the bloke who got you into Sydney property three years ago (Aug/Sep ’15) by telling you how their property investment gained 50% in three years, which made you rush out and buy the following weekend are you going to feel more like buying them a beer or punching them in the face seeing as you’re watching your investment decline in value in the current market, and are only 9% up on your original investment in three years – no more than you’ve shelled out on interest on your IO investor loan- , especially after getting an earful from the office smart ar se about the ASX200 being up twice that amount over the same time frame?

      • “Conditions have only gotten worse”

        … as they should. Added to which, the higher prices go, the harder it becomes for prices to repeat the same feat — absent a sudden charge in wage growth, of which there is zero prospect. I think the handful of people who think that the bubble can be kept aloft indefinitely don’t understand bubble dynamics. No amount immigrants will save this thing.

      • Or the dunces that listened to Steve Keen etc. a decade ago and watched Sydney houses climb above 1.1m, and are still waiting for a ‘crash’ that will drop nominal prices 50%. These dunces also pay for membership to a blog where bear porn rhetoric is pumped daily out by a writer (who is is not an economist or someone who worked extensively in finance/business- whose aim is to profit off readers via subscriptions and channeling them into the MB fund) and don’t even question the validity of the arguments presented as any attempt to do so may result in their crash fantasies being shattered. Essentially these dunces are paying to have their crash beliefs validated….all while the market repeatedly demonstrates their beliefs are bunkum.

        (Oh and not everyone bought their house in the last 2-3 yrs. Something so obvious that you tards fail to realise & acknowledge in your stupid comments)

      • “Have you gone full retard? House prices could have gone up 1000%, I still ain’t buying. I’m not in the game of speculating on house prices during a bubble, I leave that to less creative folk.”

        Your raggedy cheap ass cant afford to buy anyway…now or in the future! Lol

      • Lol, I’m just happy you’re still here spamming the place with your panic induced diarrhea. Probably says a lot about what you really think (fear) 😉

      • Panic? Fear?

        Typical tard, when u cant present a logical, well reasoned argument u just assume that any non-crashtard
        – owns investment properties
        – bought in the last 2-3 yrs
        – is heavily in debt
        – is a shill or spruiker

        LOL, I even posted numerous times that I agree a correction will take place…albeit with a modest nominal fall followed by years of stagnation. But you dunces are so reliant on a big nominal crash occurring (in order to buy your ideal house at your ideal price) that u cant handle even the slightest of challenges to your crash beliefs

      • At first I was going to write a retort, but I feel like you’re right on the precipice, so I’ve changed my mind. You know, I worry about you… Here, let me give you a virtual hug. Not just any casual virtual hug, but something a little more real, where my pixel hug holds on for that little bit extra, giving you a knowing squeeze of understanding right at the end. See? It’s not all about infantile rage and anger, there’s love in the world yet. You might be short of it in real life, but even these flimsy digital interactions can have meaning. I think Dr Phil said that one time? Or maybe it was Oprah?

      • Dont feign indifference Brenton, I know my comments have made you start to question your crash beliefs. Unfortunately you are so stupid that you’d rather continue on your path of self delusion rather than see things for what they are. The next step for you is acceptance that you’ll be renting your roach infested 50s apartment forever…LMAO

      • That’s it, let it out. If you hold onto fear and doubt, it’ll gnaw at you like a canker. Resentment, anger and irrational rage, these are the all consuming result of holding onto this mindset for too long. It’s best to accept that you can’t control it, nor even understand it (especially the latter). See, even that I’m not charging you for this vital therapy, it’s all love, baby.

      • Your dialog is becoming simpler (even more than usual), reverting, nay, conforming with the burnt out potential of your limited intellect. Accept the process. Surrender.

      • You are so well and truly stuck down the path of self delusion that you are beyond help. Keep cleaning those toilets

      • ok, but try to bring some better material? I’d like a bit of challenge at least. Feel like I’m stuck exchanging insults with an 8 year old at present.

      • Brenton,

        Can you pull the batteries out of the Remote? I mean, I don’t mind a contrary pov, but she’s just a pita.

      • Rent Seeking Missile

        Looks like we’ve found one of those people who attends Reusa’s relations parties.

      • Student investor grants sound good to me. Study here and buy a home and we will repay for student loans. Win win.

      • @Gavin: and you solve the ageing population problem (students tend to be younger), you improve the vibrancy and diversity of Reusa’s relations parties, you make the country stronger (because “diversity is our strength” as I’m sure you’re aware), you increase labour market competition which keeps costs for employers lower and therefore brings down prices for the benefits of consumers, and you ensure that racists like Dick Smith – who want to limit population growth – can never ever get elected.

        There’s more winning in there than the love child of Donald Trump and Charlie Sheen. Dearest politicians whom we love, trust and respect so much, please make it so.

  4. If house prices could be saved by central banks it would’ve been done already in all the other markets that’ve crashed including many parts of Australia……don’t you think?

    • Everyone’s situation is unique.

      We have our own currency and a massive natural resource endowment, which means our currency can’t go to zero.

      Witness where it sits today.

      • pushing our currency to zero would not prevent house price fall since they would be worth nothing in terms of all other goods (we either import stuff or sell commodities priced in USD)

      • True Peachy but one of those resources exports Coal, which is as valuable as Iron Ore we are in a love hate relationship with. We love the foreign currency it brings in to pay for the insane house borrowing but we also want to kill the industry in total.
        I would love the Aussie public to get a feel of at least a couple of months without $60B in Export revenue.

      • The U.S., Iceland, Japan, Dubai, South Korea, Hong Kong, etc., etc., etc., had their own currencies too, buddy! So did WA, NT, North QLD, mining towns, The Gold Coast. Lot of Brisvegas condos are already down 30%….last time I looked QLD was using its own currency too!

      • “pushing our currency to zero would not prevent house price fall since they would be worth nothing in terms of all other goods (we either import stuff or sell commodities priced in USD)”

        Do u numpties even think? Trashing the currency is not the means to save housing but rather the consequent effect AFTER implementing other measures that will stimulate housing eg. rate cuts, QE.

        That is why Australia having its own floating sovereign currency puts it into an advantageous position regarding housing than countries such as Ireland & Spain that use the Euro. It allows more flexibility in regards to introducing more stimulatory measures. Typical tards spewing out comments without thought

        Oh and triebs…u keep mentioning Hong Kong as an example of a bust but where does HK sit in terms of housing affordability? What are prices like in HK at the moment? Is it more or less expensive than Aust? Wake up!

        Ill make it easy for you – https://www.macrobusiness.com.au/wp-content/uploads/2018/08/Capture-307.png

      • Unfortunately, it is evident that RemoteconTroll has a better grasp on the fundamentals and true dynamics of this issue that some of the regulars here.

      • It’s almost like having your own currency is not without it’s own pitfalls; capital flight, imported inflation, an outright currency crisis.

        He is talking about the Asian crisis, where HK prices were cut in half. Of course HK prices are bubbly now, they’re suffering from the same global credit binge……. Anyone that didn’t have a major debt deleveraging during the GFC will have one in the next end of cycle bust.

        The RBA has been holding interest rates at record lows for a record period of time. At some point, the real economy throws a [email protected] hissy fit in the face of monetary lunacy. It’s like fighting gravity with no fuel left in the tank.

      • “He is talking about the Asian crisis, where HK prices were cut in half. Of course HK prices are bubbly now, they’re suffering from the same global credit binge……. Anyone that didn’t have a major debt deleveraging during the GFC will have one in the next end of cycle bust.”

        Says who? You? A self deluding toilet cleaner with no real understanding of markets and economics? Someone who just mindlessly parrots the same crash arguments ad nauseum?

        During the Asian crisis was there an influx of rich, elite mainland Chinese coming into HK buying up all the properties? hmm?

        “The RBA has been holding interest rates at record lows for a record period of time. At some point, the real economy throws a [email protected] hissy fit in the face of monetary lunacy. It’s like fighting gravity with no fuel left in the tank.”

        And how do you know that we have reached peak? Are there other countries that have housing metrics worse than Aust? Does that suggest that it is possible for things to get worse for Aust?

      • I look through your brilliant display of the ad hominem fallacy, the strawman fallacy and the complex question fallacy, toward the heart of the problem. It has nothing to do with the debate surrounding Australia’s property bubble, but is the result of shortcomings within you, as a person. I am prepared to help you, but you must first admit you have a problem. This is a critical step in your journey toward becoming a functioning human within society.

      • Answer the questions you dunce. Of course you wont because you will reveal your stupidity for all to see

      • By all means, we can have a legitimate, if simplistic debate… once you have progressed down the path of healing. At present, you are neither in the emotional, nor mental state for a logic based discussion. Especially one on a topic so far beyond your natural cognitive capability.

    • marked64 – I think Labor will go ahead with proposed negative gearing and capital gain reforms.
      The real attraction to negative gear, is the capital gain to be made selling the property down the track, property prices have reached their zenith. There will be no worthwhile profits to be made on investment properties bought recently or in the foreseeable future.
      However, property investors will still be able to negatively gear newly built housing, so let them spend on new homes, that’s how it should be.

  5. If they’re going to save house prices what are they waiting for?
    They’re arguably already too late to turn things around before this years spring auction season starts and definitely too late to stop anyone who bought post September 16 who has to sell cos life happens from losing money.
    What will it take for them to act?

      • So then are they completely impotent?
        If they are completely impotent, why do we even care what they would like to do if they still had ammo?

      • Personally, I don’t care. Yes, I think they’re impotent.

        You have 3 arguments from people who think house prices are about to turn back up to double digit growth again:

        – housing has always gone up, so will continue to do so; your average punter, economically illiterate
        – supply & demand, refer to immigration; your average specufestor, only marginally less illiterate
        – monetary easing (interest rate cuts & maybe preemptive QE) in conjunction with supply & demand tweaks (immigration); they know what they’re talking about, but I disagree.

        I think they’re stuck on the monetary easing. Without monetary easing (see credit), immigration is completely irrelevant to bubble prices. That is why everyone is looking to the RBA to see what they do (if anything), because it is literally the only game in town that has any hope of reigniting house prices.

      • Brenton, you confuse “prices” with “affordability”. Immigration will indeed Prevent affordability returning.

        Simple thought experiment – imagine an extra 300,000 people arrive in each of Sydney and Melbourne and Adelaide and Brisbane overnight – tomorrow. Obviously no new housing/infrastructure materialises overnight.

        Banks refuse to lend more than 3xincome.

        Do you think houses will become affordable?

      • You’re confusing housing fundamentals with bubble fundamentals. I’m not concerned about what happens when we bottom out, but about the bubble itself. In fact, we’ll probably find that when bubble bursts we’ve got an oversupply of dwellings.

        Australians can only bid with what they’re allowed to borrow.


      • Simple thought experiment – imagine an extra 300,000 people arrive in each of Sydney and Melbourne and Adelaide and Brisbane overnight – tomorrow. Obviously no new housing/infrastructure materialises overnight.

        Banks refuse to lend more than 3xincome.

        Do you think houses will become affordable?

        The obvious answer is ‘no one knows’ . However, one thing we do know empirically is that when net 90k people from overseas arrive in NSW over a year, Sydney house prices fall nearly 6%.

      • You are missing the point Brenton. With 300,000 extra people in the city, about 150,000 will miss out on anything resembling decent housing. The rest will be payong through the nose for any kind of roof.

        The bloke on $90k will still be unable to buy his family a house. It won’t matter one jot that the banks aren’t lending much.

      • I get your point, I really do. I’m not denying there’s a serious livability point; aka everyone is crammed into the place and will be forced to pay a premium for the pleasure.

        What I’m arguing is that prices pushed the mil mark off the back of a record credit binge within the household specufestor class. In this scenario, it is absolutely about what the banks will/can lend people.

      • Well, it’s clearly right that nobody is paying $1m for an old house in a middle-ring suburb with their savings and they need debt to do it.

        But that just means that access to debt determines the nominal level of house prices and, to an extent, who buys the house (he who has access to the credit).

        With less credit, just as many people won’t be able to afford houses. It’s just that the ones who COULD afford the houses with less credit would find themselves paying less.

        Now, that IS good thing, but it’s NOT a solution to the problem.


      • With less credit, just as many people won’t be able to afford houses.

        Maybe, maybe not. What is a little clearer because it’s already happening is that a higher proportion of purchasers will be owner occupiers compared to previous years. That is, the probability that a house that has recently changed hands ends up being used as shelter rather than as a wealth accumulation machine is better than in previous years.

    • I’ve been arguing the case for years that the RBA is far less powerful than people think, due to the internationalisation of Australian markets and investment. If the rest of the world is raising rates then the RBA has no choice but to eventually follow suit. If it fails to do so, then it must accept an expansion of its balance sheet as borrowing from the RBA becomes the cheapest option for authorised participants.

      That’s why I’ve never been so confident as MB that rates are going down. I understand completely the rationale behind why it *should* be the case, given that other central banks demonstrably cut rates and eased into collapsing asset market bubbles, but this will not necessarily be the case in Australia if our economy is moving against the tide of international economics (ie, we’re decaying into international growth).

      I’m also on the record as saying that banks were going to raise rates independently of the RBA, as a response to rising international costs (from rising international rates), before it became common knowledge that it was happening. Again, unless the RBA wants to expand its balance sheet by lending (more cheaply) to local banks, then it’s going to have no choice but to raise rates if international financing keeps getting more expensive.

      Nobody actually knows where things are going for sure. It’s a complex system and complex systems are unpredictable. People who predict direction accurately are just lucky and past gains are no guarantee of future success. We all have preferred scenarios regarding the directions of future events, but I think it’s more sensible to sit on the fence and gamble on volatility rather than direction, particularly when everyone else is making big directional bets.

  6. How could the RBA do monetary easing from the current position? A central bank can lower interest rates, but ours are at record lows so I wonder what effect it would have. Or it prints money, but this requires the federal government to assume debt as far as I understand it, and that seems unlikely. The RBA doesn’t set the prudential standards either (the recent tightening of loan requirements).

    • I’m not a buyer of the RBA / QE proposition. The US / Japan / EU can do it because there are substantial economies behind these currencies. We are tin-pot by comparison. The AUD would be decimated. That in itself would limit what the RBA can do.

    • Rent Seeking Missile

      So long as they can print money, they can ease monetary policy.
      ‘Think BIG!!’ (Rudy Havenstein)