CBA: Housing boom “not particularly helpful for economy”

CBA’s head of Australian economics, Gareth Aird, has given a terrific interview (below) on Radio 2GB discussing the Australian property market.

The discussion is centered around a report released earlier this week where Gareth Aird tipped strong house price growth over the next two years on the back of rock bottom interest rates.

For mine, the most interesting discussion surrounded whether inflating housing values is actually beneficial for the economy over the longer-term. On this point, Gareth Aird is sceptical:

Gareth Aird: “What we’re doing in the long-run is not particularly helpful for the economy. The Reserve Bank likes to see it through the lens of the short-run: if house prices are going up, then that means at the margin people are more confident to spend and you get this wealth effect.

But in the long-run, people borrowing money to plow into the housing market is not going to be a sustainable driver of growth. We’ve been using that as a growth driver for 30 years because interest rates have been on a downward trend. But there comes a day where they can’t go any lower…

At the end of the day, if central banks create this environment of incredibly low interest rates, and everybody needs a roof over their head, then they’re actually creating the environment that causes people to pay more for an asset. And that’s exactly what we’ve got”.

Michael McLaren: “Do you ever feel that we’ve created a ponzi scheme?”

Gareth Aird: “Everyone needs a roof over their head… Because the cost of debt is so low, people are willing to pay more for an asset… That’s also related to what the rental yield is. If you don’t own a place and you are paying rent, then you are going to look at the sums and think you’re better off actually buying a place…

“I think the bigger issue in the long-run is that we can’t take interest rates any lower… I think we’ll get maybe two years out of this from where interest rates are. But from then on, growth in prices is going to be linked to growth in incomes because people won’t be able to take on a bigger and bigger mortgage…”

Michael McLaren: “Is it true that between the Reserve Bank and the federal and state governments that they simply won’t allow a sizeable correction in the property market at any point because they are petrified that there would be so much negative equity that the banks would need a government bailout?”

Gareth Aird: “The government took us into recession by shutting big parts of the economy down, it’s only right then that there is a policy response that supported the housing market and people not actually defaulting on their loans.
“I think it’s in policy maker’s best interests to avoid a big correction in the housing market…

“I think given the unique nature of what we went through last year that it was the right response to support the market, particularly for people that lost their jobs for a short time”.


Unconventional Economist
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  1. I am now old and as impotent as the parliamentary inquiry into the alleged rape in Minister’s office, but if I were you I would borrow as much as the Bank allowed and make a generous offer to secure my dream home. It does not matter what you pay today, it won’t make a difference in a decade or two.

  2. Nobody thinks that increasing the price of beer, smokes, food, relations, petrol etc is a good thing. Everybody thinks that increasing the price of houses is great idea.

    Every member of the set of {Everybody} is a complete idiot.

  3. innocent bystanderMEMBER

    growth in prices is going to be linked to growth in incomes because people won’t be able to take on a bigger and bigger mortgage…

    can’t see why incomes for wage earners will increase (even given the debate about borders etc)
    but now we have a borrower mindset that the principal never needs to be repaid so it is just a matter of finding the deposit – plenty of options left for the policy makers there … (eg abolish stamp duty, higher LVR, access super, cross collateral from Mum & Dad …)

      • Jumping jack flash

        Rates dont need to be lower if stimulus is able to kickstart perpetual debt – the feedback between debt growth and wages growth is rediscovered. This feedback is quite simply CPI.

        Raising interest rates in 2007 broke the system, in my opinion, and then wage theft prevented it from being able to be fixed by suppressing CPI AND also wages growth! It was truly insanity.

        By 2019 everything was so broken that nothing they did made any difference.

        I really don’t think it is much more complicated than that.

  4. Jumping jack flash

    They need to look deeper and discover the essence of the New Economy which isnt falling interest rates. Interest rates didn’t need to fall at all. They fell as they did because they couldnt/wouldn’t cut them low enough to kick off perpetual debt drowth. Probably this was because everyone was too spooked from 2008 to admit that everything wasn’t perfect.

    Perpetual debt growth is also called debt hyperinflation but we needn’t be scared of it. Who wouldn’t want to be paid 100k a year? 200k? A coffee may be $30 but who cares. Median house prices would be 10million (and they need to reach this sometime around 2050 anyway!)

    Lowering interest rates was done so people could take on more debt, but interest rates werent lowered enough. The whole wage theft thing also got in the way, Thanks Howard and Rudd! What were you thinking? Not much, apparently.

    If everyone does it at the same time, how would anyone notice? Everything is relative or able to be manipulated.

    Enough debt needs to be created to support enough consumption to induce CPI. Then if CPI is high enough wage inflation should follow. More wages means more debt, which absolutely everyone needs. Then more debt kicks off the next debt growth cycle, as long as enough new debt has been created beforehand.
    Its really very simple.

  5. @divya I came back, didn’t want to miss Reusas reaction when house prices fall in H2, really this fake 2% interest rates when AUST and US 10 year are really on the move up……we will have a move back in yields lower to 1.1% over next month but the longer these morons print money the higher inflation and rates are going they are trapped.

    True I under estimated how desperate they would be 2% home loan rates 0% TD, honestly it’s a joke

    You wait home prices will melt down second half, I believe IRELAND 2.0 truly was just delayed ……they are trying to delay the inevitable

    I believe they cannot stop the falls anymore because the more they print and manipulate the higher inflation and higher interest rates are going. We are headed into a period similar to 70/80s where interest rates are going to rise. Just do your calculations on 7% not 1.9%

    Really the RBA and co have just sucked everyone to rush out and buy, when it’s the top

    Home prices are going to melt down in H2 when all these buyers that have paid way over the odds, settle down. The buyers will be exhausted by June 30 and prices will fall like 2017 and again 2019 and also March 2020.

    what can they do now, this is blowing up in their face, 10 year yields moving up now

    You can’t do QE in inflationary periods, just pushes up rates even further.
    You can do QE in disinflation/deflation

    Central banks are trapped

    Home prices will be falling in H2 from Q2 peak.

    Unfortunately we are going to see Ireland 2.0 into Xmas this year

    • Wont the RBA just offer 0% interest rates under the TFF for the entire banking industry balance sheet? Do banks really care what the 10yr bond rate is if they can get 0-1% debt from the Fed/RBA/ECB/JCB etc?

      • I know no one will believe me, nothing has changed, the problems are just hiding underneath, banks are going to get into serious problems in H2

        They were bailed out last March, even phil Lowe said that the rba had given more of a bail out this year than 08

        They’ve run out of shenanigans

        Banks are going to tighten up big time in H2 as credit risk goes through the roof

      • Because it makes the inflation even higher
        In deflation QE works ok

        The more QE in inflationary economies just makes rates rise even higher

        Just think about QE is trying to create inflation

        It’s like throwing fuel on a fire

        • Your problem is thinking rates and inflation are inextricably linked.
          The RBA is already talking about “looking through” inflation before it has even reached the target band, let alone gone over it.
          They can run 10% inflation at 1% interest rates if they want to, and they probably will if it gets that high.
          It is the best(and probably only realistic) option to reduce the debt burden in real terms.

      • As I understand it QE is designed to drive down the yield on bonds which forces people into higher risk assets and makes cheap debt available for people to invest. Once the target rate of inflation has been achieved the goal of QE is also achieved and thus no longer necessary. They can keep doing it but by doing it too much or too fast they risk large scale inflationary pressures as prices on all assets go higher. Unless wages follow that same curve or available cash gets invested into additional capacity you create a massive snowball which becomes unstoppable.

        Both the Fed and RBA have been saying “nothing to see hear” on inflation even though certain asset classes have never been higher. The problem is not QE in my view, the problem is how they measure inflation, or dont as is the case right now.

    • Yeah I mean what about operation twist .. isnt that there just to avoid this: “AUST and US 10 year are really on the move up”
      So that you can buy the long end.. the 10 year. So if that’s next, there’s clearly more in the barrel to throw at it!
      I think the plan is they know buyers will be exhausted by June 30, so to let immigration going again by this date… the immigration start date is determined by the next house falls date.
      Dont get me wrong, I see the truth in your words somewhere. But there’s a bit of craziness to go yet.

  6. Really ?

    artificially pushing up house prices via free money that can’t be repaid, to have higher asset prices so people will borrow more money and buy more homes and cars through debt. But if they fall it’s a disaster

    Just picture RBA, banks government in the corner of a room that they’ve painted themselves into and people are going to realise in second half this year they’ve been taken as suckers to the Ponzi scheme

    • happy valleyMEMBER

      The RBA, banks and gubmint will just lie (a core promise) and say that these poor suckerbait had a go and they got a go – so, what’s there to complain about.

      • Not this time HV
        inflation is now out of the bottle
        They have just painted over the problems

        They are so desperate …

        The fed is going to pull the handbrake by mid year

    • They have painted themselves into a corner, essentially they are running out of ways to bring demand forward to paper over the lack of underlying growth in the economy. However I think it’ll take some time for inflation to be sustainably in the target band for them to move on rates. Just tapering funding in terms of QE would have a profound impact. If inflations continues after that I think they’d look at macro or fiscal policies to rein it in before they touch rates. If after all that inflation continues (unlikely in my opinion) they may lift rates. However your magnitude of rate increases assumes that historical rates are relevant which I don’t think they are. As the world including households are much more highly in debt now, even a small increase in rates would take away significant monthly cash flow impacting consumer demand significantly. Therefore I can’t see a lift of rates or even at most a 1% lift over time. I think thinking rates will rise to 7% ect is ignoring the fact that inflation (as it is measured, not as it actually occurs btw) is a result of excess demand which is now even more sensitive to interest rate movements now than it has been in the decades prior. It’s not necessarily a linear relationship. In any case rate increases would be an absolute last resort after winding back QE, macro policies and pull back of fiscal policy which are all more targeted ways to take heat out of the economy without causing significant pull back in consumer spending. Even if it eventually came to rate rises being needed after all of those tools, it would only be a modest 1% increase to significantly dent consumer demand sufficiently.

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