The media’s bubble-banter goes on at full pace, but when you look at what the RBA is actually saying, they’re not worried about a bubble. They don’t even think the market is particularly expensive…
The Australian media’s fascination with a bubble is one part laziness, one part incompetence, and 3 parts deliberate deception.
The reports about the RBA’s announcement last week that they’re considering macro-prudential policies continues to be reported under the banner of a bubble. This headline from the SMH over the weekend summed it up:
“Bubble-busting: macroprudential for home loans explained”
And repeat a lie long enough it becomes truth. Property Observer (who could never be accused of being anti-property) ran with the heading last week:
“RBA’s bubble warning doesn’t apply to South East Queensland”
I know I’m pushing shit up a hill with a tennis racquet, but let me say it again so at least my readers know the truth.
There is NO BUBBLE.
The RBA DID NOT ISSUE a ‘bubble warning.
The RBA IS NOT WORRIED about a bubble.
But to understand this, you’d actually need to do some journalism. Not any risky, wearing a wire to a meeting with the mafia kind of journalism.
No nothing like that. All you’d have to do is actually read what the RBA said. It looks like almost none of the reporters have done this.
For your benefit, I picked it apart last week here. I know a lot of you probably missed it with the long weekend, but then on Friday I laid out why I thought the media bias actually reflected a deliberate cover-up by the banks. (I expect I should win an award for investigative journalism for this one. It doesn’t look like the competition’s that tough.)
The short of it is that the RBA isn’t worried about a bubble. They’re not worried about house prices. They’re worried about banks’ lending practices, and if they might be slipping below the grade.
So what does the RBA actually think about house prices?
Well, Assistant Governor Malcom Edey fronted the government Inquiry into Affordable housing late last week to spell out the RBA’s official line.
What’d he say? Here’s the high-lights…
“A useful summary measure (of affordability) is the repayment on a typical new housing loan expressed as a ratio to disposable income. On that metric, housing affordability in Australia has fluctuated around a broadly stable average over the past three decades, with average repayments varying between around 20 and 30 per cent of disposable incomes…
…To summarise these stylised facts:
- the ratio of housing prices to incomes is at the top of its historical range; but
- over time, this has been more than offset by falls in financing costs, so that the typical repayment burden as a share of income is not particularly high. This of course does not rule out affordability problems in particular market segments or for particular types of households.”
So he’s saying sure, compared to income, house prices are a little bit expensive. But they’re not out of line with historical averages, and on these measures, there have been times when they’ve been more expensive in the past.
What’s more, over the past three decades we’ve had a massive opening up of the financial sector and falling interest rates, so credit has become a lot cheaper.
The fall in the cost of credit has been bigger the rise in house prices, so the net effect is that “the typical repayment burden… is not particularly high.”
Noticed how he used the word ‘bubble’ to describe house prices?
Neither did I.
Not only is there no bubble, but as far as the RBA’s concerned, house prices aren’t even that expensive.
Sure, it might be tough for ‘some segments’ – first home buyers or lower-income households. But the market as a whole doesn’t appear to be expensive.
So how can there be a bubble in a market that isn’t expensive?
There can’t. If the RBA isn’t worried about the market being a tad expensive, then they can’t be worried about a bubble.
Therefore, THE RBA IS NOT WORRIED ABOUT A BUBBLE!
(am I going blue in the face?)
Is the RBA worried about anything? Well they’ve got their eye on the banks as I said, but they’re also worried about supply over the longer run.
… supply factors are critically important. It is the supply response that determines the extent to which additional demand results in higher prices over time.
Our submission highlights that Australia faces a number of longstanding challenges in this area, including regulatory and zoning constraints, inherent geographical barriers and the cost structure of the building industry. There are also obstacles to affordable housing created by Australia's unusually low-density urban structure, though this is gradually changing.
…The general point I would make is that we can't improve housing affordability simply by adding to demand… without a supply-side response, any generalised increase in demand will just be capitalised into prices.”
Exactly right. I’ve made this point more than once. There is a policy-bias across the political spectrum to try and cover over affordability problems caused by a lack of supply, by simply throwing money at certain buyers segments (First Home Owner Grants etc.)
But unless supply increases as well, all you get is a rise in prices. But I don’t reckon we’ve seen the last of them (look out for plans to allow FHBs to dip into their super for a deposit), or the last of policy-induced price rises.
But that’s a story for another day.
The key take home is that the RBA is not worried about a bubble. The don’t even think that the market’s expensive.
Can someone please tell NewsCorp and Fairfax?