Why the RBA doesn’t care about the property bubble

From Karen Maley at the AFR today:

…”To the extent that an easing of monetary policy helps people gets jobs, it will help private-sector balance sheets and lessen the number of problem loans. In doing so, it can reduce financial stability risks,” Lowe argued.

…Other economists point out that a further drop in home loan borrowing costs will probably provide a further support for housing prices, even as the banks progressively wean people off their loan repayment deferrals.

…Robust house prices boost overall financial stability because it means Australian banks will probably suffer fewer losses from home loan defaults.

Economists point out that although the RBA clearly sees the potential for further monetary easing to push house prices higher, it doesn’t seem too concerned about the possibility of prices rising too sharply.

That is because the pandemic has unleashed structural changes in the market, which will probably keep investors on the sidelines for several years.

There is one other reason that the RBA isn’t worried about house prices. That’s not its job. The responsibility passed implicitly to APRA in the last cycle when it deployed macroprudential tools to end the price boom. APRA’s intervention was triggered by exactly the same conditions we face today, the combination of weak economic growth and an overly high currency pushed up by other central bank easing.

Again the AFR can’t bring itself to discuss this fundamental change and tenet of Australian monetary policymaking, preferring the dated and silly game of RBA-watching, even though it now has a total of 25bps left to cut (until it goes negative, as it eventually will).

It’s freakin’ ridiculous. There are so many unanswered questions about APRA’s new role in monetary policy it’s crazy. Why wouldn’t a journalist ask them? Should it be rejoined with the RBA?  Why has APRA been allowed to exist in such secrecy? Why has it survived the Hayne RC humiliation without a scratch? What are the new tools that it will eventually deploy? What are the triggers to deploy them? How do other central banks do it? What is the endgame of this new monetary structure?

It’s like everybody has dropped monetary Mogodon at the AFR.

Anyways, I more or less agree with the conclusions of the piece. I don’t expect investors to rip back in when rents are crashing and there is no demand from the migration segment. But that is a Sydney and Melbourne argument. Other, less migration dependent cities, which also happen to be in the non-virus zones, will see rising owner-occupier and investor demand. Especially since they offer much better demand and supply balances and decent yields, as well as possible rental growth. There’s plenty of room to make these yields uneconomic yet too:

This means that both the RBA and APRA will remain on the sidelines in terms of tightening for the foreseeable future.

David Llewellyn-Smith
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  1. Goldstandard1MEMBER

    Sooooo they stay on the sidelines until property crashes, the masses can’t eat and there is rioting…… what do they get paid for again?

    • good question
      AI robotics always were going to cause the lay off of 30% of the white collar work force
      this work from home has accelerated those layoffs to NOW.
      that is the tipping point for the property crash
      remember: scotty let the V in. He is the one to blame.

      • happy valleyMEMBER

        Absolutely, when he flings open soon enough those international borders to sub-continentals to reinvigorate the population/housing price ponzi, that will be his bag, but probably he’ll blame that on the states/territories?

      • There’s an idea: perhaps we could have a rules-based monetary policy managed by AI.

        That way we can avoid unnecessary interactions between Gubmint and the RBA – you know, like: Hey, the bubble’s are all deflating – print up some money ya chunce!

        • The AI will just be set to have a bias towards higher house prices. “Hey, it’s not our fault prices are going up, the AI is doing it, and it’s much smarter than you or I, so shut up!”

          • How will that work if AI skedaddles some pedestrian
            to protect the occupants of a self driving car.?
            Interesting times ahead

          • Lol, yes. AI’s great – but a human still has to write the program. It would be permanently plugged into CoreLogic database.

  2. The RBA cares most about the banks and financial stability. The banks have problems with non-performing loans (~10% still not repaying) so housing prices must rise to limit bank losses by: stimulating demand via the wealth effect, allow broke punters to sell, as well as to support the value of mortgages sitting on bank balance sheets. Everything else is collateral damage.

    The ‘system’ is deperate and fighting for its survival.

    • Spot on. Except I don’t think there’s any expectation of a “wealth effect” this time around. It’s purely about protecting bank balance sheets in the name of’stability’. Demand will be collateral damage as we divert even more of our shrinking incomes to the banks.

    • “allow broke punters to sell” so we can sell at even higher prices and make even more punters go broke? All so we can eventually force out all the weak hands, destroy the middle class and have a few giant corporations own most of the houses

      • Lowe’s quote in the article… “help private-sector balance sheets and lessen the number of problem loans”

        I’d call that a pretty transparent statement, wouldn’t you?

  3. What is the goal of negative rates? More importantly and an area of APRA and RBA analytical weakness, what are the likely unintended consequences?

    • In short, RBA ‘models’ say that for every 25bps of policy rate decline you create ‘X’ number of jobs. I sh1t you not.

      Basically the entire economic establishment is in thrall to this [email protected]

      When policy rates are -5%, will the ‘believers’ still believe? Your guess is as good as mine – but the dominant school of economic thinking is fast running out of road and, in my lifetime, the modern economist’s Bible, JM Keynes’ “The General Theory …” will be consigned to the dustbin of history – I have little doubt.

    • Jumping jack flash

      Its to do with widening bank margins so they hopefully lower mortgage rates to around 1%, i guess.
      Mortgage rates can never be zero.

      It is more of the same tired old interest rate manipulation that dug the hole we’re now in over the past 20 years. There was always a reason why manipulating interest rates was considered a bad thing, and this is it.

      I dont know how that additional margin is actually realised by the banks though. There must be some payment or something made to the banks to the value of their proprtion of margin that is less than zero.

  4. I think its an utter disgrace and i also think that if it really gets traction ahead of next election then for sure it will be an election issue – but i do think it is the policy/plan of the ScoMo Real estate spiv government and also the RBA.

    I think the RBA want some wealth effect spending, and dont really mind if it feeds into a crash/need to bring the real value of the AUD lower at some indeterminate point down the track. They want the spend now.

    The government, for its part, has absolutely no issues with suckering in young families to a lifetime debt burden in an unproductive economy made ever more so by housing speculation.

    • there is no wealth effect spendnig
      the overheads of most punters exceed their income by a good margin, they were relying on housing speculation to carry the balance. On the gc, anyhow it it as quiet commercially and socially as i have ever seen it
      add this
      The government, for its part, has absolutely no issues with suckering in young soldiers to spill their blood on foreign soil
      mostly for the benefit of those who remained behind..
      BIG changes ahead.

      • “The government, for its part, has absolutely no issues with suckering in young soldiers to spill their blood on foreign soil”

        Careful, WW, you might be accused of being a Libertarian using language like that.

        • Gotti Asks today: Are we in fighting shape?
          If we are going to lock horns with China, we have to be honest about whether our economy and military capability are up to it.
          Who would sign up to support this corrupt mob.??????

      • Re spilt blood. What else would you expect of the chicken hawks in the LNP, ably backed up by Stokes. One notable exception who has been there.

      • APRA and RBA stats tell us there is $7T of housing stock in Australia, only $1.8T of housing debt split across PPOR and INV loans. As such, only a portion of the population is hocked to the eyeballs with debt and over leveraged. Many are doing quite well if these numbers are true, how much is available as deployable cash is the bigger question. If $5.2B of housing stock is paid off, the people who own that stock and who have jobs are theoretically well positioned to save or spend a majority of that income.

        250K loans @ $400K not being repaid = $100B non performing loans or 1/18th of the entire loan book. ADI’s have a CET1 value of over $240B so can well and truly cover even double the number of loans fully defaulting with no financial recovery by the ADI.

        • I should just say a couple of things on those numbers: debt and valuations are intertwined.

          In the first instance it’s the marginal sale price that values the rest of the stock i.e. one sale can, in a given area with a stock of similar homes, revalue all those homes i.e. if the sale price is 10% higher than the last sale price then all homes are 10% more expensive.

          Linked to the last sale is some mug who went into a huge amount of debt to be able to afford the higher priced home, in the process revaluing a whole swathe of housing stock.

          In conclusion, taking today’s home valuations (a snapshot in time) and deducting the outstanding debt is not the right way to calculate ‘wealth’ because that wealth relies so heavily on the debt in the first instance. Looked at slightly differently, if debt-based purchases in this country were banned entirely and people had to pay hard cash for properties going forward, what would happen to house prices? Down 85% by my reckoning (conservatively), meaning that $7 trillion of ‘wealth’ becomes $1 trillion.

    • The most important ‘wealth effect’ comes from JobSeeker supplement, and it is being phased out. Next year will see the biggest economic contraction in Australian history as GDP goes minus 20%.

    • You know Tim Wilsons recent book explores in detail that homeowners are generally more likely to vote for the Coalition. So yes that is their plan.

  5. Jim's Central Banking

    The RBA said they weren’t ready for how much post RC credit tightening would affect the economy. Now the RBA is working with regulators to maximise the chance of the property bubble continuing.

    It seems like the RBA is banking almost entirely on the property bubble continuing.

    • Jumping jack flash

      “It seems like the RBA is banking almost entirely on the property bubble continuing.”

      The property bubble is the foundation for the debt bubble. They need something to attach the debt to, and something the banks like to attach debt to. Property ticks all the boxes.

      A house/property is simply the largest container for filling with debt that the average Quiet Australian has access to.

      If you’re going to fill a bathtub with water would you use a bucket or a teaspoon?
      If you’re going to fill an economy with debt would you use shoes or property?

  6. happy valleyMEMBER

    “What are the new tools that it will eventually deploy?”
    The same old tried and true wet lettuces. What else can one do when one is severely compromised and has never been up to the task one was commissioned with?

    “What are the triggers to deploy them?”
    Bank runs when the “punters” realise that the “dodgy” Strayan banks are not a zero or negative interest rate credit for depositors.

  7. Why the RBA doesn’t care about the property bubble

    The RBA board members do care, and own many properties themselves. They want to keep it going.

    Like everyone in Australian politics they are corrupt and only look after their own interests.

    RBA board members should have to declare their assets like politicians.

    • +1 – on top of that RBA Board members should not be captains of industry with vested commercial interests, but only capable economists so the broad interests of the AU public is served, not just certain asset holders.

    • Some of the board members are part of some of the wealthiest property families in the country. They’ll consider your request when they return from their country estates or interstate. Can’t stay anywhere near the coolie spreaders they so heavily agitated for can they?

    • Hey Jon, are you Jonothan Shapiro the AFR journo? Just wondering.

      I’m sure Mr Squiggle (below) is the real Mr Squiggle so just putting it out there…

  8. Reus's largeMEMBER

    Total BS, rising house prices are the only thing that the RBA cares about, either through stupidity, corruption, self interest or all of those, their single mandate is to ensure that house prices go up.

    As for APRA …….. bwhahahahahahahahahahahahahhahahaha …. pull the other one !

    MPLOL !

  9. Mr SquiggleMEMBER

    Superannuation was the sacrificial goat of the Hayne RC. Banks are offloading their Wealth arms to show that APRA has teeth and the divestment of those businesses by the banks is providing camouflage cover for their increased property lending activities

  10. “There is one other reason that the RBA isn’t worried about house prices. That’s not its job.”

    With due to respect David, this is a bit naive. For the last 10 years at least RBA has made its main and only job as to worry about house prices that are not growing fast enough. The existence of APRA provides a useful distraction to escape the responsibility.

    How many more years of MPLOL do you need to convince yourself and not fall for this anymore?

    • House prices are at the core of financial stability in this frankenstein economy we have as the bank revenue and assets are overwhelmingly conentrated in mortgages. Therefore house prices sit at the centre of all RBA actions and considerations.

    • Stock prices, and the related leverage, are not at the core of the bank balance sheets that this frankeneconomy revolves around.

  11. I’m forever blowing bubbles, Pretty bubbles in the air, They fly so high, nearly reach the sky, Then like my dreams they fade and die. Property market and banks? A bet each way on property, which is manifestly based on investor greed, Pie in the Sky, AGAIN another CASINO! Pretty BUBBLES in the air!