Every property boom in living memory has ended badly. This one will be no different. There will be tears…eventually.
Please don’t ask me when. If I knew the answer I wouldn’t have my wife staring daggers at me while I push this article out on Mothers Day.
For the moment though, our central bank has granted our real estate bust a reprieve. It lowered interest rates. It did this – it would appear – as a reaction to the deflation numbers published by the ABS last week. The widely held view in the market is that there will be another rate cut. We are already in unchartered territory in that interest rates have never been so low. With each cut we reach a new record low from here on.
Given that cheap money is to blame for the asset price bubbles overseas (and here) it would be difficult to see the recent property boom have a hard landing whilst ever we have a cash rate of 1.75%. This translates to home loan rates of under 4%. Let me put this another way, five years ago when home loan rates were around 7% if you borrowed $1 million, you paid $70,000 in interest each year. Now, that has reduced to under $40,000 per annum. The obvious difference being that your average homebuyer did not need to borrow a million dollars five years ago.
The gradual lowering of interest rates was a significant motivation to borrow just a little more. Thus fuelling house prices in their upward trajectory. More recently, some of this upward trajectory has been tempered by APRA enforcing controls on banks for lending to residential investors as well as enforcing strict servicing criteria on potential borrowers. This is still in place.
It would appear that these two sister organisations – the RBA and APRA – have opposing policies.
One, APRA, is imposing a restrictive lending policy by forcing banks to moderate risk (not a bad thing) and the other, the RBA, is easing monetary policy which will fuel more borrowing activity. Of course it’s not just housing that benefits from a rate cut. That’s why the supply of money is being strictly regulated by APRA to rein in the housing market and (theoretically) allowing other areas to benefit. The problem is that regulatory rules implemented post GFC (Basel 3) have made it uneconomic to lend to unsecured, unrated borrowers.
While a third player, the federal government, has chimed in with a budget that is expansionary.
With a cut in the company tax rate (the individual bracket creep adjustment does not really qualify as a cut). Offsetting this is the tax to superannuants who transfer more that $1.6 million (each mind you) to their retirement savings. I have never heard so much complaint about a policy that should never have been so generous in the first place.
Now the counter argument.
Low rates and high real estate prices did not stop the markets offshore (Ireland, Spain, Hong Kong, Singapore etc) from having significant price adjustments. Of course there were other factors at play there (like high unemployment or a massive oversupply). The point I’m making is that any economic theory you hear is just that – a theory. We haven’t been here before and even behavioural economists are theorising (guessing) from here on in.
The big losers in all of this are the generation that have been perpetual losers. Those on the cusp of Generation X and Baby Boomers. They’re in their early fifties, they missed out on all the benefits of the boomers. Were taxed in the eighties and nineties to pay for excesses of the Boomers. Saw the introduction of HECS and compulsory superannuation. They did the right things and saved for their retirement and were once again hit twice last Tuesday. Any savings that they have accumulated after putting their kids through school and paying off their mortgage is now earning around 2.5% for them. It appears the government doesn’t like them either as they have effectively taxed them more for putting money into super and are forcing them to put less in.
Unlike the generations that came after them (I like to call them “the drop me off at school on your way to your second job generation”), they’ll adjust by either staying out of capital city housing markets or making the sensible choice of moving to regional cities.
As for the housing market in the big smoke, it appears that the sun was in the west and setting until the rate cut on Tuesday. We’ll know in the coming weeks/months whether or not we’ll be bathed in perpetual twilight or drown in a sea of complete darkness.
IF YOU HAVEN’T GUESSED ALREADY, PLEASE NOTE THAT THE WRITER IS NOT AN ECONOMIST.