RBA lacks credibility on housing

Christopher Joye

Coolabah Capital

Today I write that the RBA has been spinning stories (basically blatant BS) on housing, the most miraculous of which is the completely fallacious claim that cutting the cash rate from 4.75% to 1.50% between 2011 and 2016 did not drive the spectacular house price appreciation evidenced over this period (and the mother-of-all bubbles). The RBA therefore lacks credibility when it dismisses concerns about its latest spate of cuts reigniting the boom---especially given its reluctance to acknowledge its analytical mistakes in the past---with the price action observed thus far once again tracking very closely to our forecasts. I conclude by presenting new quant research that shows that outright credit risk premia on Australian bonds tend to be much higher than the spreads paid on virtually identical securities around the rest of the world, which we demonstrate is related to the Aussie super system's equity obsession and under-investment in fixed-income. Click on this link to read the full column, or AFR subs can click here. Excerpt only:

After Sydney house prices leapt 50 per cent, Phil Lowe was asked whether the RBA’s record low interest rates were to blame. He remarkably countered that the cost of capital had little role to play, instead pointing the finger at inert housing supply coupled with robust population growth.

Beyond the fact that cheap money was obviously the driver, which motivated our forecasts for rapid house price growth between 2013 and 2017, a clear flaw in Lowe’s logic was that Sydney had experienced a record building boom that many alleged had led to excess supply.

Most embarrassingly for the RBA, two of its top researchers, Trent Saunders and Peter Tulip, published a detailed academic paper shortly thereafter proving that almost all of the stunning increase in house prices between 2013 and 2017 was indeed attributable to the reduction in mortgage rates. For the avoidance of doubt, the RBA economists demonstrated that housing supply and population growth had comparatively little influence...

Our forecasting position is clear. We predicted the end of the housing boom in April 2017 (prices started falling a few months later) and a total 10 per cent peak-to-trough correction. We got almost exactly that: CoreLogic’s 5 capital city index fell 10.7 per cent.

In April 2019 while prices were still declining, we called the end of the correction and forecast a 5 per cent to 10 per cent increase in national prices in the 12 months following the RBA’s second cut. Sydney and Melbourne prices stopped falling in May and started rising again in June.

I expect that CoreLogic will shortly report that in July its 5 capital city home value index rose for the first time since September 2017. We estimate Sydney and Melbourne prices have jumped a solid 0.5 per cent off their 2019 lows. This recovery will accelerate as cheaper mortgage rates grip and the banking regulator’s easier interest rate serviceability tests expand purchasing power further. (It is a source of endless amusement that perma-housing-bears like Steve Keen and John Adams consistently get the housing cycle totally wrong, as highlighted in my recent debate with the latter.)

I would not be surprised if the housing market starts to boom again and the capital gains over the next 12 months are closer to the upper-end of our proposed range.

Click on this link to read the full column.

Disclaimer: This information has been prepared by Smarter Money Investments Pty Ltd. It is general information only and is not intended to provide you with financial advice. You should not rely on any information herein in making any investment decisions. To the extent permitted by law, no liability is accepted for any loss or damage as a result of any reliance on this information. Past performance is not an indicator of nor assures any future returns or risks. Smarter Money Investments Pty Limited (ACN 153 555 867) is authorised representative #000414337 of Coolabah Capital Institutional Investments Pty Ltd, which holds Australian Financial Services Licence No. 482238 and authorised representative #414337 of ExchangeIQ Advisory Group Pty Limited that holds Australian Financial Services Licence No. 255016.

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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 40 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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