Property Crash Just a Myth

ONCE again, the apocalypse has been averted and the four horsemen have ridden off to create havoc elsewhere. Rather than the much-heralded assault on the Australian residential housing market, as has been predicted for the past five years by an ever-increasing host of international and domestic doomsayers, we are instead witnessing an orderly retreat.

There's little doubt that Australian property is likely to be subdued for at least the next few years and that values here are likely to decline. As in previous times, the property market appears to be settling in for a prolonged hibernation after a debt-fuelled run-up. But those gleefully predicting a US-style crash in the Australian property market are so far wide of the mark it beggars belief that anyone bothers to listen.

About the only place there has been a US-style property market crash in the past few years is in the US, a catastrophe sparked by reckless lending and a total failure of regulatory oversight that ricocheted around the globe in 2007, sparking round one of the global financial crisis.

Those American-style excesses (loans to borrowers with no ability to repay) were almost universally repelled in this market. As a result, we've largely avoided the after-effects. That hasn't stopped the hyperbole by an ever increasing mob of normally reputable commentators. But the facts are far more sobering.

The official figures released this week by the Australian Bureau of Statistics clearly show a downward trend in the domestic housing market. Overall, we experienced a 4.8 per cent national decline in the 12 months to the end of December. But the manner in which the declines were carved out provides the most interest. Australia may be a nation in the throes of a once-in-a-generation economic transformation, with resources squeezing out traditional industries, but there has been little evidence of that in demand for housing.

Among the biggest surprises was that Brisbane, one of the beneficiaries of the resources boom, led the housing market price declines with a 6.7 per cent drop in the year to the end of December. Adelaide and Melbourne were next. But the biggest surprise was the pullback in Perth residential real estate, shedding a whisker under 5 per cent. Unlikely as it may seem, Sydney was the best performer of all with a decline of just 2.7 per cent over the year.

Australian residential real estate is expensive on just about any measure. And it is clear it has reached a tipping point, for it has outgrown the capacity of Australians to service the debt required to buy a property. Not only that, the stronger dollar has made our property more expensive for foreign investors. But to employ that argument as the exclusive rationale for a domestic property market collapse is naive and ignores basic economic fundamentals of market operations - supply and demand.

Given the tighter lending criteria imposed upon our banks during the boom years up until 2008, the only way that we will experience an American-style property crash here is if there is a serious lift in unemployment, which would spark loan defaults and a flood of distressed property onto the market.

That's not impossible. But it is highly unlikely given our current historically low unemployment level and our place in the global economy as a resources supplier plugged into the only growth region in the world right now.

For a US-style property collapse to occur here, we would need to see sovereign debt defaults across Europe, the disintegration of the European Union and an international banking crisis that would cripple even China. And if that happens, we'll have bigger concerns than the price of our homes.

As with any market, there is a delicate balance between supply, demand and price. For those pining for ''the good old days'' when we had ''affordable housing'', it is time for a reality check.

Housing was never affordable. All that's changed in recent decades has been a shifting of the equation surrounding supply, demand and price. In the good old days, the only reason housing was far cheaper - on an average earnings basis - was credit was restricted. Up until financial deregulation in 1983, our banks had to labour under the yoke of federal regulations that prohibited them from offering home loans to customers above 13.5 per cent. Credit was in such short supply, few were offered enough cash to buy a home.

It wasn't until our banks discovered cheap offshore credit in the mid-1990s, and brought the cash onshore, that we suddenly had ''affordable'' home loans. But the cheaper credit simply shifted the price of real estate higher.

It was a windfall for the banks, for the real estate boom resulted in ever larger loans. And those larger loans bloated the earnings of our major banks, a financial perpetual motion machine that now came to an end more than two years ago.

As a nation, it's left us with a serious, but not insurmountable foreign debt problem. (That's right, it's a private, not a government, debt that is the problem.)

It also is the reason global ratings agencies are considering downgrading our banks, particularly given the threat to international finance from Europe. And it goes a long way to explaining why our banks have aggressively switched back to domestic funding, to raising their cash at home. The adjustments are in place. A crash? Don't bet the house on it.

Property Crash Just a Myth

Big Four Tighten Grip on Market With Mortgages up $175bn

THE big four banks have further entrenched their dominance in the Australian market, growing by tens of billions of dollars despite Labor reforms to increase competition in the retail banking sector.

Exclusive analysis of APRA data by The Weekend Australian indicates that in the three years from when the global financial crisis hit in 2008, the big four have grown their mortgage books for owner-occupier housing by more than $175 billion, eclipsing smaller lenders.

Length of Reserve Bank's interest rate pause will depend on inflation

HOW long the Reserve Bank pauses on interest rate hikes hinges on the next Consumer Price Index release due late next month.
If the June quarter CPI shows underlying inflation falling into the RBA's 2-3 per cent target zone, Glenn Stevens will be encouraged to keep interest rates at neutral for most of this year, as he seeks to manage Australia's two-speed economy.

If it doesn't, the RBA will have to again increase its public inflation forecasts to the top of, or even above, its target zone. The RBA governor surely knows this would threaten the central bank's hard-won low-inflation credibility and force him to into a restrictive monetary policy mode.

This could result in rate hikes resuming from the scheduled August 3 board meeting.

The changed form of Stevens' report from Tuesday's monthly board meeting clearly underlines the new, neutral phase of monetary policy.

His statement was one-third shorter than usual, and by avoiding the usual discussion of the domestic economy it suggests the RBA is not searching for a trigger to raise interest rates soon.

Between October last year and May this year, the RBA lifted its cash rate from 3 per cent to 4.5 per cent in six 25-basis point steps.

Stevens this week called it a "significant adjustment" from the "very expansionary settings" in response to the global financial crisis.

Neutral monetary policy now is "appropriate for the near term".

While the timing is deliberately vague, the RBA's favoured choreography is to pause for six months or so after adjusting monetary policy in a series of quick, small steps.

Stevens's statement focuses on an additional reason for the RBA to stay on the sidelines for a bit. When he lifted the cash rate to 4.5 per cent in early May, Stevens suggested the Greek sovereign debt crisis had produced "very little contagion" outside Europe.

Almost immediately, however, the Greek crisis spread dramatically to global financial markets. Further bouts of market instability are likely.

Stevens now says the new sovereign debt crisis "will need to remain under review".

But he still expects the global economy to post trend growth this year, with budget tightening weighing on soft European economies, the US recovery becoming more established and China-based Asia expanding, perhaps too vigorously.

That underpins the Reserve Bank's central scenario that high iron ore, coal and other commodity prices will fuel national income and spending, and push the economy toward its trend growth rate of 3.25 per cent or so over the coming year.

Yesterday's national accounts suggest the economy is heading back to trend growth, expanding 0.5 per cent in the March quarter and 2.7 per cent over the year. But growth remains uneven as last year's budget stimulus gives way to a new wave of mining development. Retailers are complaining about soft consumer spending.

Stevens no doubt would love to keep the Goldilocks combination of trend economic growth, neutral interest rates and target zone inflation going as long as possible.

But, while the heat is coming out of housing prices, it's not clear that CPI inflation is becoming re-anchored inside the 2-3 per cent target.

In part, this reflects double-digit price increases for electricity, gas and water required to pay for a catch-up of infrastructure investment.

The shallow downturn means the economy is operating with less spare capacity than expected. The higher dollar has pushed down import prices and allowed retailers to discount heavily.

This is unlikely to keep giving and, with unemployment forecast to edge below 5 per cent, catch-up wage demands could start pushing up labour costs. In May last year, the Reserve Bank forecast that a sharp economic downturn would push underlying inflation to 1.5 per cent, comfortably below target, by mid-2011. But the inflation outlook has worsened in every quarterly forecast since then.

A mildly disappointing March quarter CPI result forced the RBA economists to tip that prices growth would edge down only slightly to 2.75 per cent this year and next before nudging back up to 3 per cent in 2012.

That prompted the RBA's May board meeting to increase the cash rate when a pause had been on the cards.

The issue is whether the June quarter CPI, slated for July 28, will again disappoint. To maintain the credibility of its low inflation regime, the central bank can't do nothing if inflation threatens to move above target again.

The Reserve Bank's mantra is that it had to go through the deep recession of the early 1990s to break the back of high inflation.

It had to work hard after that to establish the policy independence and credibility that has underwritten nearly two decades of low-inflation economic expansion.

It may have to do the unpopular thing again to keep that credibility intact.

Source: The Australian