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Why The RBA Blames Everyone Else
BY SHAE RUSSELL - 20/04/2017 | VIEW MORE ARTICLES BY THE DAILY RECKONING

It felt every second article over the long Easter weekend was about the Aussie property market. OK, that’s a slight exaggeration. But with the May budget only three weeks away, the media is chewing on every idea that comes from the boffins in Canberra.

I mentioned this recently in Strategic Intelligence. I find it odd that Aussie property is covered in the ‘business’ section. Given most papers have a dedicated ‘property’ section, housing-related issues should fall under that category. But when you commoditise basic shelter needs, it becomes a business issue.

The Australian property market is on everyone’s agenda, it seems.

Last March, the RBA’s assistant governor for the financial system, Michele Bullock, weighed in on the ‘property problem’, claiming that the RBA is uncomfortable about the ‘looming oversupply of apartments in Brisbane in particular, and possibly in some parts of Melbourne,’ adding that ‘…there are indicators that, in the event of a downturn, there might be systemic issues for the banking system.

She also posed this question: ‘Have households purchased these apartments in the expectation of rising rents and rising prices, and with a glut, may not be able to rent them out and may not be able to get the price they paid for them?

Err, is she new around here?

Of course investors are banking on long-term capital gains! Given Australia’s extraordinary track record of house price growth (1,200% in 20 years for Melbourne and Sydney on average), it would be ludicrous to think investors have bought into the market for any other reason.

I consider my tiny, cheaply-built apartment to be a perfect case study.

For the suburb I live in, I pay very little in rent. What’s more, the body corporate fees would be north of $5,000. With that in mind, my rubbery yield estimate for the apartment is around 1.5–2% annually. The owner must be relying on capital gains. Otherwise, why did they bother investing in the first place?

But back to Michele Bullock. She also pointed out that investors tend to be the first ones to exit the market if things turn for the worse.

That is true. Owner occupiers are less likely to sell unless they’re in a dire financial situation. After all, they still need somewhere to live. And the rental market is tight and competitive.

However, you can’t help but feel these sorts of statements are the RBA throwing their hands up.

Rather than increase interest rates to slow home-loan lending — and risk making the Aussie dollar stronger in the process, while eroding any value from temporarily-high commodity prices — Bullock is one of a number of people that would rather control lending standards.

The idea of lending standards being ‘controlled’ is hinted at in a recent RBA media statement. Referring to the property market, it reads:

‘Conditions in the housing market vary considerably around the country. In some markets, conditions are strong and prices are rising briskly. In other markets, prices are declining. In the eastern capital cities, a considerable additional supply of apartments is scheduled to come on stream over the next couple of years. Growth in rents is the slowest for two decades. Borrowing for housing by investors has picked up over recent months. Supervisory measures have contributed to some strengthening of lending standards.’

As usual, the brief media statement doesn’t give us much to work with.

However, here’s what we can extract from it: Interest rates should remain low for the foreseeable future. I can’t fathom the prospect of a rate rise this year.

Here’s why:

Australians now have a debt-to-income ratio of 187%. This is a record high. It’s also put the RBA in the tricky position of wondering whether any interest rate rise would ‘trigger’ unsustainable housing debt in Australia.

Furthermore, this chart from Deutsche Bank highlights just how much Aussie spending has disconnected from new housing finance. The blue line is retail spending, and the red line is housing finance issued. Both are expressed in a percentage in year on year changes, going back to 2002.

What you can see here is that housing finance has significantly broken away from retail spending in the past 12–18 months. The last time such a significant break occurred was in 2012–13.


Source: Macro Business/Deutsche Bank
[Click to open in a new window]

Deutsche Bank notes: ‘…retail can sometimes lag trends in housing, we suspect very weak growth in wages and households incomes may see this gap persist.

In other words, Aussies aren’t in a hurry to spend their money. But if people don’t spend money, inflation is unlikely to grow at the rate the RBA wants. Further falls in the consumer price index and consumer spending are likely to be contributing factors to a recession. And that wouldn’t bode well for the property market.

Meanwhile, with the US Federal Reserve is strongly expected to increase the cash rate tonight from 0.5% to 0.75%. This should let the Aussie dollar slide a little more, lifting pressure off the RBA to make any hasty decision on rates.

More than anything, though, the RBA looks as if they are keen for APRA, the prudential regulator of the financial services industry, to ‘control’ the Aussie housing market.

As reported by the Australian Financial Review, ‘Investor loans are growing at 27 per cent compared with just over 5 per cent for loans to owner-occupiers, despite the banks hiking mortgage rates for investor loans in 2016 and leaving home owners relatively untouched.

The article adds that there is talk of APRA regulating the banks to ‘lower the threshold for total lending to property investors to 7 per cent year on year from 10 percent at present.

There’s little hard evidence to suggest that this is what the RBA in fact wants. However, I don’t doubt for a second that the RBA would like to shift the ‘property problem’ on to someone else.

This feels an awful lot like the RBA saying, ‘OK, we broke it, but you need to fix it.’

The property bubble doesn’t exist…

As the RBA starts pointing fingers and getting everyone else to deal with the problem they started, Treasurer Scott Morrison has come out saying that Australia doesn’t have a property bubble.

Morrison also told the media that it’s not low interest rates stopping first-time home buyers getting into the market. ‘The problem is being able to save quickly enough to get a deposit which is big enough to actually get yourself into the market,’ said Morrison.

Morrison says little there, other than to state the obvious.

He added that Australian property prices may be high, particularly in Sydney and Melbourne, but that they represent ‘real value’:

The issue on housing affordability and prices in Australia is the mismatch between supply and demand.

It’s not the function of any sort of investor credit bubble or anything like this.

They’re real prices, they’re real values, and what we’re working as a government to do is put downward pressure on those rising prices by addressing the supply challenges that are out there and working with state governments to achieve that.

So, on the one hand, we have the RBA telling APRA the property issue is their problem.

You’ve then got a federal government looking at harebrained schemes to help more citizens pile into the property market.

And now we wait. The May budget is due out in a couple of weeks. I’m expecting the first of many harebrained political schemes to be mentioned within it.



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