RBA, not inert supply, blew housing bubble

Christopher Joye

In my AFR column I explain why the RBA, not housing supply as governor Philip Lowe conveniently argues, was responsible for blowing the great Aussie housing bubble and what assets currently look cheap in a world where most remain dear (click on that link to read for free or AFR subs can click here for direct access). Excerpt enclosed and last week's column on Westpac's hybrid can be read here:

"For years the Reserve Bank of Australia dismissed our warnings that excessively stimulatory interest rate cuts – which bequeathed borrowers with never-before-seen 3.4 per cent mortgage rates that fuelled double-digit house price inflation – had blown a bubble that presented genuine financial stability risks. This manifested via record increases in speculative investor activity, interest-only loans and, more broadly, Australia's household debt-to-income and house price-to-income ratios, which leapt into unchartered territory (notably above pre-global financial crisis peaks). The RBA narrative was very different. "Our concern was not that developments in household balance sheets posed a risk to the stability of the banking system," governor Philip Lowe recently explained. "Rather, it was more that…the day might come, when faced with bad economic news, households feel they have borrowed too much and respond by cutting their spending sharply, damaging the overall economy." Nothing to see here when it comes to financial stability, if you believe the weasel words. It turns out Lowe was privately "packing his dacks" after unleashing the mother-of-all-booms powered by the cheapest credit in history. After the sudden deceleration in national house price growth – as documented here – from an 11.5 per cent annualised rate in May 2017 to just 1.9 per cent today, the governor revealed to parliamentarians that he's now "much more comfortable…than I have been in recent years when I have been appearing before this committee, when I was quite worried". That's central speak for petrified. Lowe conceded that "housing prices were rising very, very quickly – much faster than people's income – and the level of debt was rising much faster than people's income". (We forecast that would occur back in 2013.) Yet according to the RBA's interpretation, the 50 per cent explosion in house prices between 2012 and 2018 was propelled not by the 11 interest rate cuts it bestowed on borrowers over the same period, but by a lack of new housing supply. You have to ignore the record building boom to believe this BS. Along these lines, Lowe now claims that the bursting of the bubble in September 2017 (when national prices started falling gradually) was not really attributable to the 40 basis point increase in investment loan rates – and chunkier hikes for the 40 per cent of borrowers with interest-only loans –that flowed from APRA's decision to crush speculative activity. "I don't think the tightening of lending standards is the primary thing that has changed the dynamics of the Sydney housing market," Lowe says. "It's the full supply, less foreign demand, better transport." It is precisely this policymaking hubris that sowed the seeds of the last crisis, and gives one pause when considering whether Australia is prepared to deal with the next one." Read the rest of the article here.


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