Australian regulators, including the RBA, have made it abundantly clear that they will not be raising interest rates any time soon. Equally, they have been plain that when tightening arrives it will be in the form of macroprudential policy tools not the cash rate. This is all about keeping pressure off the currency so that the Australian economy has a better chance of escaping the lowflation trap that afflicted it so comprehensively in the last cycle.
Today, Citi declares that the prospects even of macroprudential are slim. According to Citi:
- The narrowness of the current property boom – driven by first home buyers – means MP tolls will be more difficult to roll out both technically and politically.
- Limiting high LVR or high debt-to-income loans will adversely impact FHBs.
- Banks will benefit as the boom runs longer than most expect.
While these issues are true, overheating is overheating, so if the current boom runs wild and draws in investors, which is usually how such cycles run, then I’d expect the second wave at least to be targeted sometime in 2022/23.
That said, I agree that regulators will be slow to move this cycle, owing to the economy. We are currently enjoying our catch-up growth burst but that will soon pass and there are lots of embedded areas of oversupply and potential sharp slowing once it does. Add that ahead is a big fall in our bulk commodity export prices, with a renewed income shock to match that will land on wages at the margin in 2022, and regulators will have another reason to be cautious about choking off the house price boom.
Let’s not forget that the last time that Australia saw its terms of trade crash post-2012, which squashed nominal growth under a tonne of bricks, the RBA turned explicitly to blowing off house prices to offset the macro impact.
This time around there is no great mining investment cliff to negotiate but it will still hurt income materially, especially so if the Morrison Government is busy trying to repair the budget (though it will more likely be out on its arse later in 2022).
The only other wild card is if we do not reopen the immigration spiggot then wages are going to rebound more strongly than the last cycle. Even so, fewer migrants mean weaker activity in associated sectors so wage growth should not just rocket. As well, wage growth is so low now that it could more than double before it has much implication for RBA or regulatory tightening.
In short, Citi is right that the house price boom is safe for now and banks will ride it.
