This economist reckons the housing party has already started.
That’s not even the half of it.
Did you get your invite to the house price party?
It’s going to be sik. House prices’ parents are away for the weekend and it’s gonna go off.
Hang on… wait. What do you mean it’s ‘already started’?
That’s a question for the Australian Financial Review’s economist Christopher Joye. He is one of the best in the game. And last week he reckons everyone is being too pessimistic, and that, actually, “the housing party is just getting started”:
“House prices are climbing again in some areas with Melbourne home values up 0.1 percent in June in what is the first capital gain the city has recorded since November 2017.
According to CoreLogic, Sydney has also experienced its best monthly result (-0.1 percent) since July 2017 while the overall five capital city index is similarly signaling the correction is coming to an end.
This confirms our April 2019 forecast that the housing downturn would end if the Reserve Bank of Australia cut rates and we retain our May projection that national prices will climb 5 to 10 percent over the 12 months following the second RBA rate cut.
The bottom line is that with more cuts coming, and APRA yet to reduce its 7 percent serviceability test, the housing party is just getting started.
This is pretty similar to what I’ve been saying for a while now, though perhaps I haven’t stuck my head out quite so far.
I still think we could see things be fairly flat through to the end of the year.
But there’s not much point quibbling about the timing. Joye sees what I see. The market cycle has clearly turned. Momentum is with house prices now.
The other thing that Joye flags is something else I’ve pointed to: banks find it tougher in an ultra-low interest rate environment. It squeezes their profit margins and they make less money.
And that means that as the RBA drives interest rates towards their lower bound of 0.5%, the banks will find it increasingly hard to go with them. They’ll have to hang on to more and more of each cut.
… meaning that each time, the RBA gets less and less bang for their buck.
It is, as a result, plausible that the RBA gets less than two-thirds of the lending rate reductions it would normally expect from a brace of standard cuts.
…That immediately introduces the need for a third cut, which may be why financial markets are pricing one in by the end of the year. The problem, of course, is that the RBA will get even less pass-through at that time, perhaps as little as 5 to 10 basis points.
…This presumably explains why RBA governor Phil Lowe is suddenly talking about the “limits of monetary policy” and expressing a desire to see fiscal policy furnish more support.
Yep. The limits of monetary policy. Interest rates can only go so low. After that, you’re into unfamiliar territory for Australia. We never saw the money printing that happened in America and Europe.
But it will be our turn soon. The political capital is building for this kind of spending spree.
(I've written about this before too.)
So it will be rate cuts followed by helicopter money that sloshes straight into asset prices.
The ones who saw this coming in America made a Motza.
Now it’s our turn.