Nervous eyes were on Glenn Stevens this week, with some people thinking he was about to drop a bomb on property. But if you look at what he actually said, it actually looks like he’s getting the shits with all these property doom-sayers.
What does Glenn Stevens really think? And has it changed in the past couple of weeks?
Some folk have been nervously watching him of late, the way a homeless person watches the sky for rain. And there was a bit of a flurry in the markets last week when the RBA Governor seemed to single out property investors for a stern school-principle-esque lecture.
“Stevens warns property investors to tread with caution!”
…ran the Sydney Morning Herald headline.
Some people thought he was telling people to cool it. Some people thought he was threatening the market with a stick.
Both of those interpretations are jumping at shadows.
But first, it’s worth remembering why we care about what old mate Glenn thinks. First up, he’s the man with his hand on the interest rate lever. And while economic conditions in general certainly aren’t pointing towards any need for a rate hike, some folks have been calling for a rate hike to bring escalating property prices under control – specifically rocketing prices in Sydney’s super-charge housing market.
Seriously. It’s like calling the cops on your neighbours party at 7.30pm. But it takes all sorts, I guess.
The other reason why Steven’s matters is that interest rates aren’t the only tool he has to massage the property market. There’s more and more talk these days about so-called “macro-prudential” policies. Our cousins across the pond in New Zealand have just put some of these into action.
Basically macro-prudential puts limits on the risks that banks are allowed to take. In practice, in NZ, banks aren’t allowed to let high LVR loans (defined as a loan-to valuation ratio above 80%) be more than 10% of their books.
Effectively it decreases the overall ‘riskiness’ of the country’s mortgage book, but it also has the effect of cutting off demand at the knees. This, in turn, can stop prices getting out of hand.
And this is why people are calling for it here. To take some of the heat out of demand for property (particularly in Sydney) and to put a break on prices.
“Seriously officer, I’ve just got a few friends over for a couple of quiet drinks… You don’t hear me complaining when he’s playing opera at 8a.m on a Sunday…”
And the fuddy-duddys took heart when Glenn, who has previously been pretty dismissive of macro-prudential policies here, acknowledge last week that it was part of the tool kit and he could use it if he wanted to.
Never-mind that he said he didn’t think it was necessary, or that if it came it would come from APRA, not the RBA… it was enough for the fuddy-duddies to feel vindicated and pronounce that a macro-prudential ice-bucket was about to be thrown on the whole property party.
But while he was handing out straws for the property doom-sayers to clutch on to, he also gave us some insight into what he, and the RBA, really think about house prices, and whether they were expensive, or dare I say it…
… a bubble!!!
Da da daaa.
On this front, Stevens was keen to make a few points:
First, with dwelling prices having fallen between 2010 and 2012, some recovery was not in itself particularly cause for concern, certainly not initially. Moreover, if we think there is a need for higher construction, which we do, an environment of declining prices is probably not conducive to that outcome. Some pick-up in housing prices as a result of lower interest rates was to be expected; it shows that monetary policy is working and is part of the normal transmission process.
Ok. Straight-up. Rising prices are a normal part of the cycle, and are exactly what you’d expect following the soft patch we’ve just seen. Nothing to worry about here folks.
In fact, you need higher prices to encourage builders to get building again, and Glenn has said elsewhere that he doesn’t think we’re building enough new homes, especially in Sydney.
Second, were there to be a further big run-up in prices, with past increases leading to overconfident expectations of continuing gains, it would be a different matter. If this were accompanied by a return to significant increases in household leverage, from already high levels, that would be a matter for concern. It would be adding risk to the system.
So that’s not to say unrealistic price growth might be a problem one day, even if it isn’t now. But even then, it’s not a huge problem unless people are being silly with how much they’re borrowing.
But, third, to date the amount of new borrowing does not appear, overall, to be imprudent. The rise in the value of loan approvals over the past year of around 20 per cent is certainly significant. It’s important to note, however, that scaled by the amount of credit outstanding, the rate of this flow over recent months, while clearly well off its 2011 low point, is actually not that high compared with longer-run history (Graph 2). It’s only a little above 2008 lows, in fact. The growth of credit outstanding for housing is about 6–7 per cent per annum, or slightly above trend nominal income growth. It’s hard to mount the soap box to complain about that pace.
In a nut shell, lending isn’t giving the RBA anything to worry about. It’s on the up, but by historical standards, it’s still running at a cushy pace. It doesn’t look like Aussies are over their head with debt. People aren’t ‘imprudent.’
In a nut shell, prices are growing, just like we want them to be, and we’re not worried about a thing.
And check out the dig at all the fuddy-duddies at the end. “Get off your soap box!”
Well said Glenn. Drinks a my place later, yeah?