Why high house prices hurt super...

Christopher Joye

Excerpt from my column in the AFR today:

Deutsche Bank's chief economist Adam Boyton asked in a recent report, 'Does the Reserve Bank of Australia's cash rate look too low in the wake of the hike from the Bank of Canada?' Inspired by Irish UFC champion Conor McGregor's latest press conference with boxer Floyd Mayweather, I emailed a pithy response: "Fook yes!"

There is little doubt Martin Place is behind the curve given rate changes today take another one to two years to have their full effect.

While I will return to the task of normalising the RBA's Lilliputian cash rate later, for now it suffices to state that anyone hoping that the latest savage sell-off in fixed-rate government bond prices (on the back of loftier long-term yields) will abate should not hold their breath.

A much higher share of children aged 25 to 34 are living with their parents.

On the balance of probabilities, losses in portfolios loaded up with interest rate "duration" risk will mount, albeit in a stop-start, two steps forward, one-and-a-half steps back fashion as the community comes to grips with the reality that the opportunity cost of capital cannot remain near zero – or a fraction of its true "neutral" level – forever.

The RBA's super-stimulatory monetary policy settings have bequeathed Australian families with an unprecedented 190.4 per cent household debt-to-income ratio; the most expensive house prices in history (the median Sydney house price is now $1,050,000); and an off-the-charts leap in the nation's house price-to-income ratio to 6.5 times, which according to UBS is uncharted territory.

For years the RBA's financial (in)stability department has erroneously alleged that there was nothing to worry about here while we repeatedly warned them of these outcomes.

The unanticipated consequences of this policy failing are sundry. For now let's focus on superannuation and the possibility it could be woefully inadequate for many savers' retirement income needs given an unexpected increase in their future living costs.

When former Treasurer Paul Keating introduced compulsory superannuation in 1992 the household debt-to-income ratio was just 73 per cent, the median Sydney house price was $161,000, and UBS's house price-to-income ratio was merely three times. All these metrics have sadly multiplied in the years since.

Crucially, about eight in 10 of the retirees Keating was targeting in 1992 owned their homes outright with no outstanding mortgage debt.

Fast forward to 2017 and affordability problems have pushed the home ownership rate down with many Australians suffering from "financial repression".

This refers to the process by which artificially cheap money transfers wealth from savers to borrowers (and hence renters to owner-occupiers). More than 30 per cent of all families now rent with many left with little choice but to do so for the remainder of their lives.

Australian families are also entering their twilight years with more mortgage debt than ever before. RBA data shows that whereas households aged 55 years and over had debt-to-income ratios less than 50 per cent as recently as 2002, today this number is converging on 100 per cent...

Read the rest here.

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Christopher Joye

Christopher Joye is Co-Chief Investment Officer of Coolabah Capital Investments, which is a leading active credit manager that runs over $2.2 billion in short-term fixed-income strategies. He is also a Contributing Editor with The AFR.

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banks housing super

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