Australian Housing Speculation And Financial Stability

Australian stocks are set for a weak day today after poor economic data in the US saw the Dow fall by nearly 300 points overnight. Durable goods orders fell 1.4% month on month in February, casting doubt on the strength of the US economy.

It’s only one month though, and one data point, so nothing to get too carried away with. And the Dow is still near record highs and remains in a strong uptrend.

Closer to home, the ASX 200 is struggling with the 6,000 point barrier. It’s made a couple of attempts to breach this level lately with no success. Funnily enough, back in 2008 it was also an area of resistance.

As you can see in the chart below, after the market’s initial plunge lower from the 2007 peak, it rallied from 5,000 points to right on 6,000. From that point it turned back down. Seven years later, and here we are knocking on 6,000 points again.

It will take a few attempts to get there, but if the RBA keeps up with its easy money mantra and politicians and regulators stand around twiddling their thumbs, it’s bound to break higher at some point.

That’s because the market knows the current policy and regulatory regime encourages and rewards speculation, while only issuing the odd caution to look partially like a responsible adult.

Which brings me to yesterday’s news…

Sometimes you just have to wonder. Maybe someone really is having a great big laugh and the joke is on us. That’s certainly the way I felt when the RBA released its quarterly ‘Financial Stability Review’ yesterday and I saw the resulting headlines in the mainstream media soon afterwards…

‘Reserve Bank sounds warning on house prices’, said Business Day.

The Financial Review went with ‘RBA sounds alarm on property speculators’

The Australian opted for ‘Property risks increasing: RBA’.

All these news outlets duly reported how ‘concerned’ the RBA was about the effect on financial stability from fast rising house prices.

But not one of them took the RBA to task for causing the increase in risks in the first place! It’s hilarious.

Let’s just get this straight. The RBA cuts interest rates with the express intention of creating a housing boom to offset the decline in mining investment. And then when that policy starts to ‘work’, the same institution issues a document that ‘warns’ about the destabilising effect house price speculation, which is precisely what they intended to happen by lowering interest rates.

The logic is seriously mind-boggling.

Here’s what happens, in the RBA’s own words, when you cut interest rates deeply:

‘Investor housing loan approvals in New South Wales have increased by almost 150 per cent over the past three years, and now account for almost half the value of all housing loan approvals in that state. They have also increased quite strongly in Victoria over the same period. At the national level, growth in investor housing credit has continued to increase over recent months, to now be around 10 1⁄2 per cent in six-month-ended annualised terms.’

But don’t worry, bank regulator APRA is on the case. The RBA thinks it’s still too early to see APRA’s measures show up in the numbers.

It is too early to expect a material slowing in investor loan approvals or credit growth in response to APRA’s measures, partly because of the pipeline of pre-approvals already agreed before the measures were announced.

Errr…what exactly are these APRA ‘measures’ referred to by the RBA? This is where the joke gets even funnier. The RBA is referring to a letter sent by APRA to the banks in December, telling them to go easy on the lending or they would do something about it. No doubt, the banks roundly ignored this letter and continued to throw money at investors to throw money at dilapidated Sydney property.

But the source of the speculation is not the ‘property’…it’s the land. This is something Phil Anderson at Cycles, Trends and Forecasts has been on about for ages. And he thinks its only going to get better (or worse, depending on your perspective).

Melbourne had its land boom and bust in the 1880s and 1890s. Now it’s Sydney’s turn. Sydneysiders, you might want to dust off the history books to see how that one turned out.

The RBA is probably the only one waiting for the effect of APRA’s ‘measures’ to flow through. Meanwhile, they’ll continue to feed the market sugar and then warn it about the risks of getting diabetes.

While not much of a consolation, at least the RBA understands the big picture risks of letting a housing bubble get out of hand, even if they don’t intend to do anything about it.

…the main risk from the ongoing strong level of investor activity is most likely to be macroeconomic in nature. Heightened investor demand can amplify the housing price cycle, especially when it involves the use of leverage, and so increases the risk that prices later fall significantly; investors are more likely to engage in speculative behaviour than are owner-occupiers, and they face lower barriers to exiting when the market turns down.

Last week’s Bank for International Settlements quarterly report made this risk clear. It showed that asset price deflations, especially house prices, have a major impact on economic output.

Even though the RBA has a mandate to maintain financial stability, and even though history shows that house price booms and busts have a major impact on economic output (and therefore employment, one of the RBA’s other mandates) the central bank chooses to ‘sound warnings’ on the issue of financial stability, rather than do anything about it.

Instead of the RBA, APRA and the government working together to ward off what is shaping up to be a major threat to Australia’s economic future, there is a head in the sand mentality and classic arse covering taking place.

Current policy coordination is a joke, but the joke is on us.

As I’ve said previously, you won’t get genuine change in this country until you get a genuine crisis. Given the people in the driver’s seat in Australia right now, a genuine crisis is where we are headed in the next few years.

A good example of this occurred on Lateline on Tuesday night. It lead with a segment about the budget, and how the current government now thinks that government debt of around 60% of GDP wouldn’t be too bad, even though they proclaimed a budget crisis when in opposition.

Then the two shadow treasurers proceeded to engage in a juvenile and depressing conversation about the budget while addressing none of the important structural issues.

In short, it was embarrassing.

Well before we get to government debt of 60% of GDP, Australia will lose its AAA status. That will put intense pressure on the economy. What most people seem to forget is that we have a massive reliance on foreign capital to sustain our standard of living. Right now, that capital gets assurance from Australia’s AAA rated status.

When that status goes, the cost of credit for the entire economy will rise and will plunge us into recession, if we aren’t already in recession beforehand.

Of course, a lot of this rhetoric on the budget is all about preparing the electorate for a weak as p%ss effort come the first week of May. Instead of preparing people for changes that need to happen, the government is downplaying the need to do anything at all.

That pretty much sums up the quality of political discourse in this country right now. No one has the standing to do what needs to be done. So nothing will get done.

The ignorant will continue to bask in their blissful state. The aware — that includes you, dear reader — will continue to feel frustrated and helpless as you watch this great country go further down the wrong path.

Greg Canavan,
for Markets and Money

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Greg Canavan is a Contributing Editor at Markets & Money and Head of Research at Port Phillip Publishing. He advocates a counter-intuitive investment philosophy based on the old adage that ‘ignorance is bliss’. Greg says that investing in the ‘Information Age’ means you now have all the information you need. But is it really useful? Much of it is noise, and serves to confuse rather than inform investors. And, through the process of confirmation bias, you tend to sift the information that you agree with. As a result, you reinforce your biases. This gives you the impression that you know what is going on. But really, you don’t know. No one does. The world is far too complex to understand. When you accept this, your newfound ignorance becomes a formidable investment weapon. That’s because you’re not a slave to your emotions and biases. Greg puts this philosophy into action as the Editor of Crisis & Opportunity. He sees opportunities in crises. To find the opportunities, he uses a process called the ‘Fusion Method’, which combines charting analysis with more conventional valuation analysis. Charting is important because it contains no opinions or emotions. Combine that with traditional stock analysis, and you have a robust stock selection strategy. With Greg’s help, you can implement a long-term wealth-building strategy into your financial planning, be better prepared for the financial challenges ahead, and stop making the same mistakes that most private investors do every time they buy a stock. To find out more about Greg’s investing style and his financial worldview, take out a free subscription to Markets & Money here. And to discover more about Greg’s ‘ignorance is bliss’ investment strategy and the Fusion Method of investing, take out a 30-day trial to his value investing service Crisis & Opportunity here. Official websites and financial e-letters Greg writes for:


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