Last post, I talked about the RBA’s bogus “warning to investors”. Here’s what I told the AFR. How much do you think they published?
In my last post, I was talking through some responses I gave to a journalist at the Australian Financial Review. I noted that the RBA’s so called “warning” on property was a bit of a beat up, but actually carried with it a hidden game-changer.
And that was the potential for the bank to introduce macro-prudential policy. Macro-prudential is a pretty new thing – only a few months ago Glenn Stevens was calling it a ‘fad’. Basically it refers to any measure aimed at ensuring the integrity (and survival) of the financial system as a whole (compared with micro-prudential, which is keeping an eye on individual banks.)
New Zealand already has macro-prudential policies in place. There, it’s about restricting the amount of loans banks are allowed to issue with high loan to valuation ratios. But that’s not the only way to do it.
In fact, the RBA and APRA have a lot of options. Most people seem to think (and the RBA has hinted) that the RBA has a preference for boosting the minimum interest rate assumptions banks use when approving borrowers for new loans. Most lenders currently apply 2-to-2.5 per cent buffers over borrowing rates. This could be isolated to investor loans if the RBA is only worried about investor borrowing.
But they could also force banks to increase the toughness of loan-serviceability tests the more properties an investor has in their portfolio. Or if they factor in a fall in the property value of 10% to their risk analysis, they could make them use factor in a 15% fall.
They could also force banks to increase the amount of capital held against particular types of loans – investor loans or interest-only loans for example.
At the moment, Mac-P has political cover, with Joe Hockey on record a few weeks ago saying he broadly supported it, so long as it was targeted (restricted to investors, or to Sydney or Melbourne I guess), and time-limited.
So it is a real possibility. Everything is in place.
What do I think of Mac-P? A lot depends on what shape it takes. I don’t imagine it will affect me personally, since I tend to be a credit-worthy borrower, and I don’t have a lot of interest in the markets the RBA is concerned about (Melbourne CBD apartments for example).
I think New Zealand’s choice of Mac-P was a bit unfortunate, because it hits younger, poorer, first-home buyers hardest, and barely touches rich nobs like me. I can’t see us going down that road.
But this is new-age economics. Like quantitative easing. We don’t have a lot of precedents to go on. There’s a lot to try and think through…
Do I think we need Mac-P? I’m not convinced. I definitely don’t think there’s a bubble, and I’m not convinced that markets have departed from reality, even in Sydney and Melbourne. I think the case still needs to be made.
A lot was made of the following charts, which showed that investor activity was on the rise:
Again, this doesn’t phase me much. Investors as a percent of the population are up from about 8% to about 11%… that’s not much to write home about is it? I think it’s great more people are getting into investing.
The proportion of investors who negatively gear is still pretty high for such a dud strategy, but over the past 5 years, it hasn’t gone anywhere… it hardly looks like a market careering out of control.
The other chart that cause some waves was this one:
What it shows is that investor share of loan approvals and house prices are correlated, and it seems to show that investors are driving the market.
That’s what a lot of people have said, but I’d argue it’s the other way around. When prices start picking up, rising prices call investors back into the market. When they’re falling, investors wait on the sidelines.
Who wants to buy into a market where prices are falling?
So I think all this talk about the RBA being worried about a ‘bubble’ is a bit OTT.
And that’s what I told the journo at the AFR.
For what it’s worth, here’s the statement I gave him in his response to whether I thought Mac-P was a good idea, if I thought there was a bubble, and if I thought Mac-P would hurt my business…..
“I'd say there's definitely no bubble in Australia. Just because prices are rising, or out of reach of some segments, doesn't mean that the market isn't working. I've been saying for sometime that given the mismatch between strong population growth and weak construction rates in recent years, particularly in some of the capitals, together with record low interest rates, this kind of strength is exactly what we'd expect.
The other point is that right now, the boom is pretty localised. It's in large segments of Sydney and Melbourne, but around much of the country price growth is pretty ho-hum. So any macro-prudential measures that were applied across the country could end up doing more harm than good. The RBA needs to be careful to not be too Sydney-centric here.
The real question is why Sydney is running so far ahead of the rest of the country. Partly that reflects catch-up for the slow period that followed 2003, partly it's about an ongoing under-supply. I think it's too easy to point the finger at investors, who in my view are just responding to some pretty clear market signals.
I think it's probably not a bad thing for the RBA to be giving the cage a bit of a rattle right now. These are interesting times in the market. And I think would-be investors need to be a bit savvy. You can't just blindly blunder into a market like this. We always encourage our students to invest with yield in mind, and put in the hard yards when it comes to research and due-diligence. There's no short-cuts.
I don't think MP policies will affect our business, but if it gets investors thinking twice, and clears out some of the shonky operators, then it could be a good thing.”
So what happened to the story? And what’s the real (hidden) agenda here?
More on that tomorrow…