Ian Macfarlane: House prices at ‘permanent high plateau’

Via the ABC’s Michael Janda:

Hindsight is 20/20, so they say, but some big calls do seem to stand the test of time.

One of those is the Reserve Bank’s decision to start raising interest rates in May 2002, having cut them only five months previously.

In his statement explaining that rate cut, then-RBA governor Ian Macfarlane had expected the global downturn following the dotcom bust to worsen and Australia to feel the fallout.

“The dampening impact on other parts of the economy of global events will become increasingly clear during 2002, at a time when the housing upswing will begin to moderate,” he had predicted.

But that didn’t happen. In fact, the US economy posted strong growth in early 2002 and the rest of the world was being dragged along with it.

Moreover, the moderation in house prices that Mr Macfarlane forecast didn’t eventuate.

By May 2002, Mr Macfarlane seemed to be following the famous adage generally attributed to economist John Maynard Keynes, “when the facts change, I change my mind. What do you do, sir?”

“The strong rises in house prices seen over recent years have also been associated with a rapid expansion in household debt, a process that carries longer-term risks if households become seriously over-extended,” he wrote then, justifying the rapid about-face on rates.

“To persist with a strongly expansionary policy setting would risk amplifying inflation pressures and, over time, could fuel other imbalances such as the current overheating in the housing market, potentially jeopardising the economy’s continued expansion.”

Reserve Bank tapped the brakes on housing bubble #1

Looking back on that decision in a recent interview with Joseph Walker for his Jolly Swagman podcast, Mr Macfarlane said he was “very happy with the result”.

Gentle is something of an understatement. On average, house prices kept rising for another two years and then remained broadly steady for a few years until the rate cuts and first-home buyers boost in the wake of 2008’s global financial crisis stoked them again.

But, for first-home buyers the damage had already been done.

During Mr Macfarlane’s tenure as central bank boss, average capital city house prices rose 120 per cent and went from being just above four times annual incomes to nearly seven.

Mr Macfarlane argues part of this surge was the inevitable consequence of taming inflation.

“We finally got inflation down and were able to bring interest rates down, and when interest rates came down people could afford to service bigger mortgages,” he explained.

Bigger mortgages, of course, mean people have more money to spend on houses, pushing up prices.

Capital gains tax cut sparked ‘crazy’ property speculation

But that had already happened in the 1990s, so what explained the pop in house prices at the turn of the millennium?

“On top of that we had something that was really harmful, which was pure speculative activity, particularly through negatively geared acquisition of second, third, fourth, fifth properties,” Mr Macfarlane continued.

“I’m particularly talking about a period around the turn of the century, from 2000, particularly 2002, 2003, when it was at its peak.

The interview doesn’t really dive into it, but there’s only one major policy shift that could have triggered such a stampede into speculative property investment — that is the Howard-Costello government’s decision in 1999 to effectively halve capital gains tax (CGT) overnight.

(Albeit, probably exacerbated by its goods and services tax, which pushed up the cost of building new homes relative to buying existing properties).

This 50 per cent CGT discount gave higher earners a strong incentive to convert current income from salaries, profits and investments into future capital gains that would be much more lightly taxed.

The obvious way to do this was through borrowing money to buy an investment property, deducting the interest bill against your current earnings and (if properties prices kept going up) pocketing the profits from selling while only paying tax on half of them.

To give a sense of the change in the property market after the CGT discount, the number of taxpayers reporting a rental loss jumped from 631,435 in 1999-2000 to more than a million in 2005-06, while the number of landlords reporting a profit actually fell from 532,472 to less than half a million.

Effectively, this meant Howard and Costello left Mr Macfarlane’s Reserve Bank to clean up the mess it made of the property market with the only tool the RBA has — the blunt one of interest rate rises.

Luckily, America’s rapid recovery from the dotcom bust and China’s epic growth in the early-2000s, with the Australian mining boom that triggered, meant the RBA could do this and check further property price gains without sinking the broader economy.

Reserve Bank generated property bubble #2

The next property price bounce was sparked by dramatic interest rate cuts — the cash rate more than halved from 7.25 per cent to 3 per cent in just eight months from September 2008 to April 2009 — and the Rudd government’s first-home buyer boost during the global financial crisis.

But it was fleeting — the government grants were temporary and then-RBA governor Glenn Stevens stuck with his predecessor’s playbook and started hiking rates again by October 2009 as it became clear the worst of the global crisis had passed.

However, as the mining boom turned to bust and desperate for another source of economic growth, the Reserve Bank itself turned to residential construction as saviour.

With no major changes in government housing policies, it’s abundantly clear that the property price boom that ran from 2012 to 2017 was largely down to the RBA’s rate cuts, from 4.75 down to 1.5 per cent.

It wasn’t as big as the early 2000s boom nor, Mr Macfarlane said, was it “so exclusively dominated by speculative investment purchases”.

But he added it “definitely did seem bubble-like”.

Swapping houses for holes

One of the reasons it wasn’t as dominated by speculative investors was intervention by the regulators.

The banking supervisor APRA, in consultation with the Council of Financial Regulators (which includes the RBA), started putting the brakes on investor lending in late-2014, probably trying to avoid a repeat of the early 2000s “craziness”.

Nonetheless, house prices across Australia’s capitals jumped by two-thirds, dominated by increases in Sydney and Melbourne.

That prompted APRA to limit other forms of risky loans, such as interest-only mortgages, while ASIC and the banking royal commission focused further scrutiny on lax lending standards.

By the end of 2017, the boom ran out of finance and out of momentum.

Prices fell around 15 per cent in Sydney and 11 per cent in Melbourne, but were still more than 80 per cent higher than when Mr Macfarlane left the RBA.

Once again it was Reserve Bank rate cuts — this time in conjunction with APRA loosening its lending restrictions and the re-election of a Coalition Government promising the continuity of investor tax breaks — that turned home prices back upwards.

While that might spell relief for property owners, developers, banks and real estate agents, Mr Macfarlane isn’t sure it’s a good thing for the economy longer term.

Where to now?

Having now seemingly twice avoided property crashes after bubbles, does the former Reserve Bank head think it will be third time unlucky for Australia?

“Do I see the risk of a collapse in house prices? No, I don’t,” he told the Jolly Swagman podcast.

“I think that those huge long-term structural factors are so powerful, the desire for people to compete with each other to buy houses or apartments in places where there are good jobs, which means big cities, people coming from other parts of the world to do it, people coming from the country to do it, people are already here doing it.

“I think a fundamental shift in the relative price of housing has occurred over the last 30 or 40 years, I don’t think it’s ever going to go back to where it was.”

But does that mean anyone who can should rush out to buy investment properties? Mr Macfarlane thinks not.

“I don’t think it can continue to go up as fast as it has over that period,” he forecast.

After leaving the Reserve Bank’s top job, Mr Macfarlane crunched the numbers and believes most property investors would have been better off putting their money elsewhere.

“If you’re lucky enough to buy right at the bottom and sell at the top, yes, you will make money. But that’s only a minority of people who do that,” he said.

“The majority, I think, either make not much more money than they would’ve in the bank or, in many cases, they lose money.”

For the few who do succeed at making money out of rising property values, he had this message.

“You’re making yourself richer at the expense of your children.”

And, like the use of non-renewable resources or the pollution of a finite Earth, that kind of intergenerational theft clearly isn’t sustainable.

Permanently high plateau anyone? Like so many of these boffins, Macfarlane is more mythmaker than seer or effective regulator. He oversaw the birth, adolescence an early adulthood of the great bubble yet he likes to see himself as hosing it off. Whatever you say, mate.

As for the future, of course it’s going to unwind. What do you think is going to happen when Australia has no rate cuts left, its terms of trade collapse as China goes ex-growth, and fiscal austerity persists anyway?

Australia is going to get cheaper. A lot cheaper. Including houses.

You can argue how it will happen, and over what time frame, but it happening is as certain as anything in economics.

My own view remains that this is a bull trap for house prices. We know that the iron ore market will correct through the next two years on supply side normalistion alone. Add China passing through peak steel and over the next few years, with volumes falling away at a decent clip in the enxt few years and becoming very serious by the mid-2020s.

As that happens the current income crush will turn into elephant sitting on the chest of every Aussie household such that they won’t be able to breath at all.

There’ll be no help from the RBA and the Budget will be slashed across the jugular.

Only the external sector can save us then and to compete everything will need to deflate a long, long way.

David Llewellyn-Smith

Latest posts by David Llewellyn-Smith (see all)


  1. Price.

    In my opinion of the price situation, this is a bull trap and prices will go down.

    I will post my opinion of the shelter situation later.

    • Scotty from marketing

      Houses will decline by 10% over 2020 with upswing starting in middle of the first quarter 2021 place your bets oh btw I am 1 of the minority boys surfing on the back of your sweat how good is it have big brain and appetite for risk you got know when to fold and when to hold its a jungle out there Darwinin

    • Strange EconomicsMEMBER

      Now who was it said prices can remain out of kilter longer than you can remain solvent (or today – prices can remain high longer than you can wait to buy , probably 10 more years…)

    • The shelter situation in Sydney (and Australia generally) is that good housing is in short supply and the situation is getting worse.

      50 years ago the housing situation was about housing people.
      Our society was not perfect. However housing was about shelter. In 1970 good housing and the good things needed to support it had been increasing faster than the population. As a result good housing become increasingly easy to obtain.
      In 1970 you could look back to the recent past and see all the extra stuff that had been built.. damns, roads, railways. They were recent.

      But at some point in time the focus moved off shelter and onto price. The elites decided to stop building so much more good stuff, and instead jam more people into the existing stuff. Of course the elites could profit from this. Suffering is reserved for the plebs.

      The decrease in adding good stuff, combined with increases in immigration, ensured that good housing would become more difficult to obtain.

      housing easy to obtain = lower price
      housing more difficult to obtain = higher price

      Imagine a person who owns a house in Sydney:

      Over the years the house is still providing adequate shelter, but is providing less access to jobs, less access to hospitals, less water and less reasonably-priced electricity and gas. But it is still pretty much the same house as ever and is of similar VALUE to the person.

      Over the years the price of this house has risen enormously. The price of the house is how many dollars someone else would pay, or is forced to pay for something similar.

      As a society we should concentrate on the value of our houses and try to create as many great valuable houses as we can for our people.
      We should not concentrate on trying to raise and keep raising the price of houses.

      • In old fashioned terms, you are focusing on the distinction between “use value” and “exchange value”.

        And you’re right, over the last however many decades, people have started thinking about housing as exchange values, rather than use values.

        The creation of the shortage of housing use values obviously enabled this divergence.

    • +1

      HNH, I read most analysts, decent economists (Bill E) and I’d say you are up with the smartest !

      The one person I was waiting for to come back from holidays with even just a slightly bearish & cautious view (I wasn’t expecting you to be as bearish as me) but when you came back bullish I was going to (quietly) cancel my MB membership.

      The bush fires (although very sad) are a message, that Australia, you have become a greedy & corrupt country that believes you are different from the rest of the world, have become arrogant and entitled. You had a chance to implement MP after the GFC and even implement at least some of Haynes RC recommendations, but you decided to go to the trough like pigs and fraudulently re ignite the bubble that had started to deflate.

      We are about to pay the price, it’s going to be very painful and very sad for many innocent Australians.

      We are now heading into the Great Australian Housing Crash this year and 2020 is going to be the BIG AUSTRALIAN SHORT”

      • I don’t know whether you’re right about this year being ‘the year’, but it matters not.

        The popcorn maker is standing at the ready!

        I just can’t wait for those magnificent BBQ conversations: so then, Dave, how’s that IP portfolio working out for you these days?

        (As I try not to p!ss myself.)

        • Dom,
          Be careful giving it to people when it happens. I would just quietly observe.
          Noone wants to hear I told you so.
          When they are in negative equity, they will know, don;t worry.

          • What’s the point of being right in the first place, if you don’t get to rub it in???

            I don’t get it.

          • Peachy, I think it’s best to just protect yourself and close friends if they will listen which is unlikely.
            Many people are innocent and just believed on what they are being fed.
            Most on this site, may not be fully convinced but they know something isn’t quite what we are being fed.

        • Dom: you might find that while real estate fluctuates in cycles (like most assets) the long-term trend is for it to appreciate. Not always, but very often. No guarantees.

          I’m unsure why you are so confident of a crash, though my best guess is envy and resentment of not having made money on property.

          • Davey, I’ve ‘made‘ plenty on property – anyone my age has. But most who have made money have money through ignorance. They are not the geniuses they think they are. Get my drift?

        • I think you are missing the point. Your comment sounds like sour grapes. It doesn’t matter that you are right or your position is morally and socially justifiable. The point is you have been wrong for nearly 20 years and you haven’t made a cracker from it. Maybe your mates will piss themselves laughing when they tell you at some future BBQ that they just sold all their IPs, made a killing and now buying in to the new low prices.

          • Fvck off Joe you stupid cvnt. Check out my comment above.

            And get a membership before littering these boards with your reckless bile.

            Do you own a large block with a tennis court? No you don’t. When you do come back and school me.

      • Wait, so, lightning strikes etc are a message to us all that we are all greedy and corrupt….
        ooohhhhkaaay maaate

        • HC
          I’m not saying that a ghost is appearing during the night.
          It’s more subtle.
          “Things seem to occur together” “when it rains it pours”, these are phrases that are widely accepted.
          Why do things happen at the same time, I don’t know. They just do.
          The other things I have written, extreme changes in the weather caused by changes in the sun etc, volatile weather fluctuations, fires, floods, hale storms, volcanic eruptions (even if you don’t believe it’s the sun, fair enough, I am not going to try to convince you but you can’t deny, it’s happening – I live in Melb, it’s insane the changes in weather) or some new disease in China that is going to kill you if catch it. These events effect the way humans behave and the decisions they make. “when it’s still and sunny, people seem to be happier”
          When chaotic natural events occur, people become more cautious afterwards. It creates more fear, people travel less and spend less. It’s humans that are making the decisions, whether to buy a home, go to visit Aust on holidays, fly international etc
          I don’t think I am writing anything that most people don’t already know. These major events have flow on effects that cause other things to happen
          You just have to look at things more deeply.

      • “fraudulently re ignite the bubble that had started to deflate.”

        Haha, and you didn’t see it coming. I’ll take
        My predictions from someone else, thanks.

        • Scotty from marketing

          You will survive peachy but if I was you I would be selling my weres in seq as decline starts in the South

      • up with the smartest
        So, the two resident brainiacs (bcnich and HnH) are in full agreement? The matter is then settled.
        One is relying on solar winds, the other on a crystal ball… they cannot be wrong.

          • Scotty from marketing

            No sun spots dont affect climate change only co2 the fires will come again next year no 1 wants to live in smoke haze 3 months of the year do you want to shorten your life span by 15 to 20 years didn’t think so

        • You just wait until the mid 2020s. Although aren’t we now waiting for interest only reset smash happening in 2020 and 2021. It’s difficult to keep up with the fiction.

        • Tezza instead of being critical, why don’t contribute with something even half intelligent, you and the Arthur Morgans of the world. At Reusa puts his view up and he replies without sarc.

          • Hey mr nicholson, whats your opinion of the crystal balls available on aliexpress? Do u rate their forecasting ability or is it just cheap chinese junk?

          • Funny you should ask – last week started on a new job to try and predict those and other pairs (for a sg bank).
            I dunno, but what I am sure is, if I used your “methodology”, I would be out before the end of the day.

    • My own view is that houses might be cheaper (for foreigners via currency value dropping $AUD to get smashed) but it won’t help the locals and living standards will go bust, so your average Aussie on the street won’t be much better off, but foreign buyers may be able to buy at a lower conversion rate.

  2. must. protect. bank. balance. sheets.
    Especially when Australian banks are freak-show concentrated into residential mortgages and HALF of Westpac’s lending book is interest only. Sustained house price falls = bank failure.

    For this reason ‘the system’ will do what ever it takes to prevent that from occurring.

    • Exactly. This is one reason house prices will never be allowed to fall.

      Even a 20% drop in house prices will result in trouble for the banks if they have to “mark to market” the rest of their portfolio. The banks will then need more capital, which will be imported, and the AUD will drop. A falling AUD will stoke inflation, and the RBA might raise rates making prices drop further.
      This is why I believe the RBA will never raise rates again. We’ll see inflation, low rates and low AUD.

    • What this boils down to is: Inflate or Die.

      You’re right: it’s about financial system solvency. Inflate the money supply, prop up house prices (balance sheet collateral) etc etc ad infinitum.

      What happens to ‘real’ house prices is what really matters though — and they will get hosed. You can take that outcome to the bank.

    • Jumping jack flash


      Also nonproductive debt can’t generate its own interest obligation. Only through the magic of debt repaying the interest on debt can this ball of debt we call an economy be sustained.

  3. Hope this housing effer falls over with same magnitude as The Australia Fire Event 2020. Wonder if it would make front page news??

    • John Howards Bowling Coach

      I’d say one thing for sure, if a bushfire breaks out in the housing market, the government will not sit on their hands for a moment before calling in reinforcements (buyers) from overseas like they did with firefighting resources.

  4. John Howards Bowling Coach

    I love the Irony that we should listen to one of the chief architects of the housing bubble on the reasons why it is not his fault. Who cares what he says now, he failed.

    • If you listen to the pod, he essentially says we have a bubble built on top of another bubble but all good, nothing to worry about.

      • Jumping jack flash

        The new economy is a self-sustaining bubble of debt. A debt engine.

        How that manifests itself doesn’t really matter. Houses are usually the item of choice to attach the debt to because a house is the biggest debt bucket an average person can obtain and fill with debt.

        Banks also love houses. They’re generally fairly stable in terms of LVR

  5. I have a problem with the general “house price vs income” and “house prices will fall” thesis. That is the exclusion of debt servicing and inflation from the discussion. Unless RBA completely messes up Argentinian style, interest rates will only rise when we get wage inflation. That means REAL house prices will fall, and not necessarily nominal house prices.

    That brings us to the REAL crisis (double-entedre rather than a pun). We have been asked to save for retirement vs low interest/yield. If yields remain low then we cannot save enough. If interest rates rise shares are going to get smashed in real terms and we will not have saved enough.

  6. STRAYA: crashing since 2000 (nnnnot).

    All depends where.
    Lots of people with lots of cash money and equity.

    Is Byron Bay and surrounds going to crash, I don’t think so. Prices off = cash money flowing in to buy up on the dip.

    Tarneit and Broadford Wallan etc, sure.

  7. Jumping jack flash

    ““I don’t think it can continue to go up as fast as it has over that period,” he forecast”

    So. Wrong.
    The fact is that debt inflation must accelerate continuously. If not, then how is the interest on that nonproductive debt pile arttached to all the houses gping to get paid?

    What inflation in manufacturing or other actually productive undertaking is going to get tapped to pay that interest obligation if the debt expansion itself cannot?

    I noticed he never mentioned the interest. That’s bankers for you. They never speak of the interest because that’s their skeleton in the closet. As soon as they mention the interest their plan falls over… or is revealed.

  8. Yeah, I think if you read between the lines he is all over the place. Saying it’s not a bubble but then implying that it is one. Saying it’s not that bad, but then implying that it kind of is quite bad.

    If you have a whole lot of people throwing their investment money into what he acknowledges is something that for most is not worth it, and that you will only make money if you got in at the bottom and got out at the top? I mean, come on man, have a look at what you are saying.

    At least the last line was good.

    “You’re making yourself richer at the expense of your children.” Maybe Aussie dumbf**ks should think about that for a few minutes.