RBA could blow bubble back up

Christopher Joye

Coolabah Capital

In my column today I write "if only the RBA had its brilliant new research on the impact of interest rates on house prices back in 2013 when I warned them that their easy money policy would blow a huge housing bubble, as it subsequently did" (click on that link to read the column or AFR subs can click here). Short excerpt only: 

I have long argued that the RBA made a major forecasting error when it slashed its target cash rate from 4.75 per cent to 1.5 per cent and repeatedly assured the public that this would not fuel double-digit house price growth nor a sharp re-leveraging of household debt, which is precisely what happened.

While the RBA does not target house prices with its monetary policy settings, it is obliged not to amplify financial stability risks. And it is this part of its official mandate that it failed miserably between 2013 and 2017.

One of the RBA’s silly operating maxims is that it never admits it is wrong for fear of undermining its credibility. So instead of acknowledging the fact that Martin Place made an error when it blew the bubble, multiple governors have told the public and politicians porkies.

In numerous addresses they have wiped their hands of any responsibility for the sudden 50 per cent jump in house prices between 2012 and 2017, sheeting home blame to inert housing supply and population growth. One flaw in this thesis is that the supply-side was, in fact, doing its job: Australia has experienced the largest increase in housing construction on record.

Unfortunately for the RBA’s bosses, their own boffins have now debunked their junk. In an outstanding new paper two RBA economists conclude that the “reduction in real interest rates [effected by the RBA] accounts for most of the subsequent boom in dwelling prices” since 2011.

My column also talks about the current LIC craze and the mis-selling risks associated with this, subsequently segueing into some important analysis on corporate bond liquidity. Credit liquidity is generally poorly understood. Most institutional investors confuse the constrained ability of market-makers to inventory bonds on their balance-sheets since the 2008 crisis with poor secondary market liquidity. Yet the latest US Federal Reserve research demonstrates quite the opposite. Secondary turnover in the investment-grade corporate bond market as a share of all bonds outstanding has consistently increased since 2008 and is now higher than pre-crisis levels. Likewise bid-offer spreads, which exploded in 2008, have trended down for years and are actually now tighter than they were before the crisis. The same is true of market impact costs and new primary issuance liquidity.

Read the full column here.

Christopher Joye
Portfolio Manager & Chief Investment Officer
Coolabah Capital

Chris co-founded Coolabah in 2011, which today runs over $8 billion with a team of 26 executives focussed on generating credit alpha from mispricings across fixed-income markets. In 2019, Chris was selected as one of FE fundinfo’s Top 10 “Alpha...

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