If you are worried about all this talk about a housing 'bubble' and have delayed buying a property or put off other decisions as a result then you have fallen into a well laid trap, or perhaps you are following a path that the RBA (Reserve Bank of Australia) and others are trying to steer you down.
Blogger: Adrian Stagg, director, Embark Intelligent Property Investment
Don't believe me? Here's why
This country's monetary policy in recent decades has been set and controlled solely by the RBA (this wasn't always the case). Fiscal policy is set down by the government of the day with the assistance of Treasury and the competing interests of other Departments and that government's policy agenda (meaning it can get messy and complicated).
As the name suggests, monetary policy relates to the supply and cost of money.
Interest rates are the price (cost) of money and, whilst they can also have an effect on supply, the RBA's legislative ability to regulate supply and cost has largely evaporated over the past 40 years or so with deregulation as they moved away from or eased legislated controls such as LGS and SRD ratios, abolition of interest rate ceilings, exchange controls and the like to a Liability Management model.
So, with the removal of that legislative ability to impose controls the RBA has come, through necessity, to rely more on setting interest rates but even then their ability to impose those changes in getting the banks to follow suit has been found wanting as we have seen in recent years with banks often choosing their own path.
Even when banks do agree to change their lending rate on mortgages, especially when the change relates to a reduction, their internal policies often leave the client's monthly payments unchanged.
The big problem for the RBA in this deregulated globalised environment now that we have a floating dollar is the effect of interest rate changes on the rate of exchange for that dollar. Make no mistake - the RBA is poised on a knife's edge in balancing it's interest rate policy lever. Here's why.
The effect of the GFC
It's very nearly six years now since our markets started to head south. It was five years ago last month that Lehman Brothers collapsed and we were engulfed by the GFC, the biggest financial mal event since the great depression. No other financial event has received such widespread media coverage at a time when media reaches us at all times of the day and in every place we visit - like it or not.
Furthermore, financial news has never been so prominent and widespread.
Here in Australia we escaped the worst of the GFC yet it scared the pants off most investors, home owners, business people and those who need to be employed.
As a result countless plans have been delayed, decisions put off, retirements avoided, expansion plans placed on the back burner etc, etc. All this has led to massive pent up demand, especially for housing as our population continues to rapidly increase.
With Australia's economy in good shape compared to most other western economies these past few years and the strength of investment in the mining boom, our currency has been very strong which has hurt many sectors of the economy, (even mining), to the point where a lot are at, or near, breaking point.
With mining entering a new phase it has now become very important and urgent to assist and stimulate those sectors through creating the conditions for a lower aussie dollar. For the RBA that means low interest rates.
To their frustration the low rates to date have not translated to people spending money. Retail prices are still low; profits patchy and minimal. The dent in confidence was deep. Conservative consumer habits developed during the GFC are proving hard to shake. Three years of a hung parliament with all the negativity it brought did not help, just exacerbated things.
Yet all this time our population continued to grow. Pent up housing demand was growing, yet confidence and job security was still weak.
Change isn't just coming - it's here!
That's right and there is more to come. Confidence is returning and we've got a new government. People are back out looking to buy houses and it has got the RBA scared. They are scared because we not only have a major under-supply of housing but also labour and resources required to build more.
The laws of supply and demand then dictate that this puts upward pressure on existing housing stock which does nothing to stimulate the economy and is counter productive to what the RBA wants. Pent up demand is so great that if left unchecked it may lead to a bubble. Then again it may not.
But wasn't that a bubble in US housing prices that caused the GFC? Maybe - in very simplistic terms. It's a good scary story though.
So in this deregulated environment what does the RBA do? Increase interest rates (and by so doing the Aussie dollar) to pour ice on the housing market at the expense of every other sector such as manufacturing, retail, farm, tourism etc, etc? It's a dilemma.
RBA's new Power Tool
A few years back, having lost most of their statutory controls the RBA discovered another powerful tool to harness. It's called "publicity" and use of the media. They noticed how the media hang on every nuance of the RBA Governor's utterance.
They need to keep interest rates down and they also need badly to stimulate the economy at large to fill a sizeable hole left by falling mining investment. Any uncontrolled surge in prices of existing houses is just not productive except for assisting a few real estate agents. So what better idea than to flag in the media the possibility and then call it "likelihood" of a housing bubble? Try and scare the punters away before it ever happens. They've even enlisted the likes of APRA and other spokespeople to join in the 'cause'.
This story has been getting a good feed and continues to do so. Insurance and fund management industry spokespeople even blamed self-funded retiree's with their SMSFs as the main 'housing bubble' protagonists locking the poor (still scared) first home buyers out in the cold.
Of course they have a major axe to grind as they have witnessed the SMSF sector take charge of their own money management instead of entrusting it to them, depleting the pie that the fund managers controlled for many years by many billions of dollars, with more than $500 million dollars going into SMSFs each and every week according to the Institute of Public Accountants.
Fund managers don't like it and you can bet that they will be lobbying the new government for some changes - just what I am unsure. For their part the government will also be eyeing that SMSF pie too because there's a huge stash of cash there. Oh how to make use of it?
So what about the bubble? Evidence please
Truth is there is no bubble.
Sydney prices have been buoyant and auction clearances above 80 per cent. According to RP Data, Sydney prices were up 8.4 per cent in the last 12 months whereas the previous 12 it was only 1.2 per cent and the year before that they were down 2.4 per cent.
Prices elsewhere in the country have told a similar story in a general sense over the same period, though not as buoyantly as Sydney - yet.
Sydney always leads and we all follow.
Brisbane, according to RP Data, has only risen 1.8 per cent these past 12 months after some decreases and a flat market following the extensive flooding experienced all over Queensland these past two years. So follow we will but is it a bubble?
The answer is an emphatic NO.
We are simply now in the early stages of upswing in the investment cycle. Remember how back in April and May we studied the property cycle in quite some detail? You can go back and read it again here if you missed it.
The fact is that the RBA does not want to increase rates or have plans to do so anytime soon. They do want to encourage broad activity however across most sectors of our economy, even new home building, but price inflation of existing housing stock is not a preferred outcome so they are attempting to scare people a little to slow things down avoiding use of their interest rate lever.
About Adrian Stagg
Adrian Stagg is a director of Embark Intelligent Property Investment and has been actively involved in the property industry in one way or the other since the 1970’s.
His first foray at an unusually young age was as an investor. Since then he has worn the hats of Real Estate Agent, Renovator, Builder, and Property Developer and of course, home owner.
He has witnessed several cycles in the property markets during that time and now guides clients looking for ‘an edge’ in their journey through the property investment maze.