IMF hits Aussie house price crash panic button

Via the AFR comes the IMF in an unusual break with the tradition of agreeing with whatever the locals say:

Australia’s housing market contraction is worse than first thought, says a top IMF analyst, leaving the economy in what he called a “delicate situation” that boosts the need for faster infrastructure spending and even potential interest rate cuts.

In an exclusive interview, the International Monetary Fund’s lead economist for Australia, Thomas Helbling, endorsed last week’s federal budget forecasts for recognising the “weaker outlook” and its use of sober commodity price forecasts.

…Given those factors, Dr Helbling said the Reserve Bank was right to shift last month from a tightening bias to a more neutral stance given weaker-than-anticipated GDP figures for the fourth quarter and “signals of weakness” elsewhere across the economy…”I think the question is: will it need to change the monetary policy stance, and I think they are looking at that.

More infrastructure is already coming. The problem is not that it has fallen short, more that the nature of the spending is difficult to sustain given each year you have to build more than you did the last to add any growth at all and as projects roll off that gets more and more difficult. As the following ANZ chart shows, the NBN has now peaked and although governments are hosing out new projects they just can’t keep up:

Despite all of the hoopla, infrastructure investment will withdraw from growth for the next two years and, without a another NBN-like monster, never recover.

That leaves us with monetary policy and the IMF also released new research today that is thoroughly off-message vis the locals:

This paper discusses the evolution of the household debt in Australia and focuses on the empirical analysis of the impact of a monetary policy shock on households’ current consumption and durable expenditures depending on their level of debt. The discussion about the level and distribution of household debt concentrates on the concern whether household consumption could respond differently to monetary policy changes, given that current levels of the household debt are much higher compared with previous episodes of policy rate increases.

The paper finds that high debt exposure is more prevalent among higher-income and higher wealth households. Nevertheless, the debt exposure of lower-income and more vulnerable households has also increased over time, and thereby more exposed to risks from rising debt service. The presence of over-indebted households at both low- and higher-income quintiles suggests that macro-financial risks have increased, suggesting a need for close monitoring.

Despite the high debt level, households’ debt service burden has remained manageable due to historical low mortgage interest rates and given that financial institutions assess mortgage serviceability for new mortgage lending with interest rate buffers above the effective variable rate applied for the term of the loans. However, downside risks on debt service capacity and consumption remain with regards to a sharp tightening of global financial conditions which could spill over to higher domestic interest rates.

The empirical analysis investigates the transmission of monetary policy shocks to the current consumption and durable expenditures of households with different debt-to-wealth ratios. With reasonable assumptions and using the large sample of households available in the HILDA survey for 2001-16, the results corroborate that households’ response to monetary policy shocks will vary, depending on both their debt and income levels. In particular, the results suggest that households with high debt tend to reduce their current consumption and durable expenditures relatively more than other households in response to a contractionary monetary policy shocks. At the same time, households with low debt may not respond to monetary policy shocks, as they hold more interest-earning assets and thereby can smooth 22 their consumption using the higher interest income, suggesting that for these households, the income effect dominates the intertemporal substitution effect.

The results of the analysis suggest that, with a larger share of high-debt households and given their high responsiveness to a monetary policy shock, it may take a smaller increase in the cash rate for the RBA to achieve its policy objectives, compared to past episodes of policy rate adjustments. It corroborates recent RBA research, which suggests that the level and the distribution of the household debt will likely alter monetary policy transmission, in other words, more bang for the buck. By responding gradually, the RBA can still meet its mandates.

The implications of higher household debt for monetary policy have also required that the RBA addresses this challenges in its communication. The results of the textual analysis show that the RBA’s communication has increasingly focused on the impact of household debt on monetary conditions and financial stability over the past decade, consistent with the rise in debt-to-income ratios. Markets have also started to take into account household debt in their assessment of monetary policy and market expectation analysis. Therefore, continuing with a transparent and strengthened communication strategy on issues related to the household debt and household consumption will further improve predictability and efficiency of monetary policy in Australia.

So much for the RBA’s old chestnut that ‘debt is contained within those high income households that can afford it’. As Banking Day legend Ian Rogers concludes:

In short, the IMF staff paper can be read as supporting the more severe, hard landing scenarios for the Australian banking industry, drawing on an abundance of local data and the Fund’s deep understanding of the last, worldwide, banking crisis in 2008.

Picking choice quotes once more to wrap up, the IMF trio talk up the settled “evidence on how high leverage in combination with asset price shocks can lead to demand driven recessions.”

They “found that the marginal effect of a decline in home value on tighter credit constraints is significantly larger for postal codes that have a high housing leverage ratio.”

Modern day Australian banking to a tee.

Rate cuts cometh.

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  1. Seriously though when the globalists want an ever increasing amount of the pie, the punters have less to pay the loan even if they can get one. The IMF maybe woke up. It’s not realky a crash yet either, but could be. Flood the country with minted i.migrants must be on their radar.

    • The pie is not a fixed size — if it grows we can all benefit. The issue is ‘policy’ and what that does for the prospects of economic growth — real economic growth, not the Mickey Mouse GDP (consumption-driven) number that authorities are so fond of.

      Higher taxation, over-regulation and deficit spending are pretty much guaranteed to stymie any efforts to grow the pie (unless you believe in the consumption based model, in which case you can create the illusion of growth — but only for a time).

      I think it was Ray Dalio who was quoted recently as saying that capitalists were concerned only with growing the pie but didn’t know how to do it responsibly while socialists were concerned with dividing the existing pie but didn’t have any clue how to grow it. While not a fan of Dalio, that’s a broadly accurate description.

      • I agree. I just couldn’t be bothered to state it as eloquently as you. We get screwed which ever party are in. To be well cared for you need to either be in the 1% or certain unions. BTW Dalio just gave 100M to some US charity. That’ll get him a nice tax break like Gates etc.

      • DominicMEMBER

        Compulsory viewing! Looking forward to that skit being played across all television networks. Er …

  2. Good thing NBN only did fibre to the node … loads of room to spend more on fibre to home 🙂

  3. I was travelling out to Tullamarine Airport yesterday arvo, courtesy of an Uber-driver whose ‘regular job’ was real estate agent.

    I was in no mood to pour salt into his wounds so pleaded ignorance around the subject of property prices. Things had been a bit ‘soft’ for 12 months or so but property was in the process of ‘bouncing back’, he assured me.

    As an aside the traffic was horrendous (Sunday arvo FFS). Took nearly 35mins to get from Nicholson Street to the M2 via the Park and Mt Alexander Rd.

    • HadronCollision

      had a chat with my bangaldeshi taxi driver en route to conf in Syd last week

      claimed AU didn’t have an immigration problem bringing in low skills and we only bring in high skills
      (i had to exit the discussion as my head was spinning)

      • DominicMEMBER

        I hear you. Sometimes you have to acknowledge it’s not worth going any further with it.

      • BubbleyMEMBER

        Its true. I take a lot of taxis and most of the drivers are accountants from the sub continent who can’t get jobs as their field.

  4. If only we could have infrastructure projects that actually added productivity to the economy. Most of the major road and rail projects won’t help with travel and logistics. Not only that, they are over budget, late and in the end the cost will be slapped onto commuters with tolls and fees, cutting people disposable income. Same with the NBN; late, over budget, wrong structure and in the end expensive for the end user.

    • Jumping jack flash


      Focus on building the means to boost national income to fix our nonproductive debt problem. Pushing piles of money around inside the country isn’t going to fix the problem where the piles are constantly being eroded by nonproductive debt.

  5. Apart from Adelaide YoY, we have another of those inspirational “all red” days on the Corelogic daily indices, with Melbourne hitting -10% Yoy. And Adelaide YoY is now down to 0.63% and trending lower. What a great investment return for Adelaide based specufestors. I look forward to the complete red wipeout there in a month or two.

    Meanwhile, it looks to me like the flattening of the decline over the first part of the year is starting to reverse, and we’re accelerating downwards again in Sydney and Melbourne. That’s something I didn’t expect to see until around July sometime, so I may be suffering from premature congratulation. We shall see.

    • I calculated the 28 moving average for Sydney – to me it looks like it’s stabilising on around 0.8%, but that it fairly recent. The 28 day decline for Sydney peaked at 1.9% just before Christmas, and since then it’s been normalising.
      However prior to Novemeber it was in a band from 0.5% to 0.8% so the current trajectory is still at the upper end of that range (just that November through mid-Jan saw extremely fast declines)

      • I run a 42 day (ie 6 week) moving average on the daily deltas in Sydney and Melbourne. These numbers were declining in both markets (ie price drops were getting smaller over time) but have recently started to increase.

        Mistaking noise transients for signal by looking at short time intervals is the root of all evil, so I’m not gonna bet my house on this because I don’t have one…but…green shoots and all that.

      • The other factor is the large differential between falls in houses and units combining into the dwelling daily data (especially in Melbourne). According to my calculations, as of 1st April, Melb house median had fallen -17.04% from peak, but units only -7.85%.

      • I hope they keep coming out with this nonsense so policy makers don’t lower teh rates.

      • yeah, like reserve is some fixed nature determined number
        reality is that sellers finally gave up and started lowering their expectations

        way smaller and older house on a smaller block next to the rail tracks sold for the same money in 2016

      • pingupenguinMEMBER

        Yes Gavin, but the downside of them printing this nonsense is that the punters who can hold on do…which means less downward momentum in panic sales.
        We are looking at 2 places in Sydney that have both had scheduled auction dates, been pulled from auction due to lack of interest and are sitting waiting for someone to come along and buy. We have made offers but quite low-ball and have been rejected because the baby-boomer owners paid these off years ago and believe that another boom is around the corner and they just have to wait it out. This is not helped by “rah-rah” articles on the MSM saying that some houses selling above reserve is representative of the market.

        Until it is clear in the MSM that there is blood in the street we won’t get these types to sell up quickly because in the meantime their agents can make soothing noises and keep things steady.

    • I may be suffering from premature congratulation.
      That can be awkward at times. You better get it looked into.

  6. cutting rates from already low levels doesn’t help as much because principal component of the repayment is large portion of it (at 3.5% principal component accounts to almost 40% of the repayment)
    even cutting rates to 0% would not provide as much stimulus as IO “liar loans” of the last few years

    • HadronCollision

      please explain?
      on my loan at 3.59 interest approx half of entire monthly repayment

      • 40% is for first year of a 30-year mortgage. Maybe you have only 20 or 25 years remaining.

    • Jumping jack flash

      They would surely love some inflation but any inflating in anything is quickly grabbed and given to the bank to pay back those trillions of nonproductive debt dollars. The gouging of essential goods and services, aka cost of living, and the high immigration, both to try and force inflation and create wage capacity, is a direct result of the enormous debt.

  7. Jumping jack flash

    “the nature of the spending is difficult to sustain given each year you have to build more than you did the last to add any growth at all and as projects roll off that gets more and more difficult”

    Which simply means they’re trying to fix the same problem with the same failed solutions that were tried the first time(s). The infrastructure needs to be productive infrastructure to cover the nonproductuve debt problem we have, not shiny bells and whistles. They do nothing to fix the debt.

    “high debt exposure is more prevalent among higher-income and higher wealth households”

    Considering that wealth is now defined as debt then the only measure we have left is income from productive activities, and savings. Indeed these are the only actual measures of wealth. Everything else is debt foam.

    “Rate cuts cometh.”

    Inded they do. More debt will always fix a problem of an infinite debt machine that has created too much debt. At least for the short term. And thats the only term that matters.

    But the interesting thing will be whether the banks start doling out more debt as a result. I think they will not. Which will be the best outcome imaginable: highly indebted people will get debt relief but no new debt is created. Its not going to fix the house prices but it may help spending. Probably not wages much – any wage capacity will be immediately seized to repay debt.