The RBA’s “bubble warning” is a total media beat-up, but beneath the noise is a real game-changer for Australian property…
On Thursday afternoon I received a call from the journalist at the Australian Financial Review.
He was after comment on the RBA’s “warning” to investors.
What was this “warning”? I checked the internet, and the news papers were full of fire and brimstone… Take this gem from Chris Uhlmann at the normally dour and conservative ABC:
The Reserve Bank has given its strongest warning yet that a dangerous property price bubble in Sydney and Melbourne could destabilise the economy.
It's now ramping up talks with other regulators to introduce lending controls to head off the risk of a damaging correction in prices.
Whoa. I could hear the grannies choking on their tea and biscuits. It’s strong stuff. Is that what the RBA really said?
Well, no. Of course not. Here’s what the RBA actually said – well the passages that caused all the hoo-ha (my emphasis):
The low interest rate environment and, more recently, strong price competition among lenders have translated into a strong pick-up in growth in lending for investor housing – noticeably more so than for owner-occupier housing or businesses. Recent housing price growth seems to have encouraged further investor activity.
As a result, the composition of housing and mortgage markets is becoming unbalanced, with new lending to investors being out of proportion to rental housing’s share of the housing stock.
Both construction and lending activity are increasingly concentrated in Sydney and Melbourne, where prices have also risen the most.”
There’s nothing we don’t know here. But it was the characterisation of an “unbalanced” market that caught people off-guard. The RBA is usually very careful about its choice of words. Did they mean to scare us good folks?
They go on:
“The risks associated with this lending behaviour are likely to be macroeconomic in nature rather than direct risks to the stability of financial institutions… a broader risk remains that additional speculative demand can amplify the property price cycle and increase the potential for prices to fall later, with associated effects on household wealth and spending.
… In this environment, recent measures announced by the Australian Prudential Regulation Authority (APRA) should promote stronger risk management practices by lenders. The Bank is discussing with APRA, and other members of the Council of Financial Regulators, additional steps that might be taken to reinforce sound lending practices, particularly for lending to investors.”
Anything in there about a “dangerous property price bubble” or the risk of a “damaging correction in prices”?
And really, the media was in such a rush to turn this into a “bubble” story, that I almost missed what this is really about.
This isn’t about the threat of a property bubble. This is about bank lending practices. When they say there’s the possibility of “macroeconomic” effects, what they’re saying to the banks is that if your lending practices get sloppy, and we end up with a shakeout in the property market, it will be on all of our shoes.
They’re making a moral argument for getting involved.
And why do they want to get involved?
Well, as I’ve argued before, you never have a bust when there’s a shortage. It’s always an over-supply of housing that causes a collapse in house prices. We saw it in the US. We saw it in Ireland.
But for the first time in a long time, we’re seeing signs of saturation in some markets – the inner-city CBD market in Melbourne in particular.
(You might remember I was warning about that market a few weeks ago. I swear Glenn Stevens subscribes to these blogs. email@example.com, is that you?)
As they pick out:
Apartment construction in the inner city has been at high levels for some time and, given the time lags in completing higher density constructions, is expected to remain elevated for the next few years.
No kidding. 85,000 apartments are already in the pipeline!
A related risk, which is likely to be currently most pronounced in Melbourne, is that some new developments may appeal to a relatively narrow segment of tenant or owner demand.
For example, some new developments involve smaller-sized apartments that are targeted at international students, which could be harder to sell in the secondary market than more traditional-sized apartments.
This could place downward pressure on apartment prices if student demand weakens or if there are other shocks that reduce foreign investors’ appetite for these apartments.
I’ve warned about the dangers of these shoebox apartments before, and the RBA is right alert mum and dad investors to the dangers, and to warn the banks about taking on too much exposure to this market.
But are there any warnings from the RBA about the rest of the property market? No. Nothing. Their concerns are very localised.
That said, this is still pretty serious stuff. Effectively the RBA is flagging the prospect of macro-prudential policies to balance out the market. Until now, they’ve said there’s been no need. Now it’s a possibility.
This is a game-changer.
I’ll explain more in my next post, but the real warning here is for the banks. They’ve noticed that competition for mortgages has become fierce. There’s reports of cash bonuses for switching banks. It’s hotting up. If that translates into loose lending practices, then we could end up with a real problem on our hands.
The RBA is watching closely.
And really, these record low interest rates were never designed to ramp up only the housing market. They were meant to lift the entire economy.
But the banks have been a bit lazy. They taken the cheap cash and funnelled into mortgages, because that’s where the easy money is.
Lending to business, especially small business, has been woeful.
You’re never going to grow an economy that way.
It’s probably an admission that the RBA thinks the broader economy needs lower interest rates. But it can’t do that for fear of sparking a frenzy in housing… they’re in a bind.
Anyway, more on that, and just what I told the journo from the AFR, on Thursday…
Have you experienced a tightening of bank lending for your own investments?