It’s not often that the RBA issues warnings on housing.
The RBA works incredibly hard to maintain it’s neutral status. Being the Switzerland of Australian government institutions isn’t easy.
I remember back in the 2004 election or something, there was a Liberal flyer that misleadingly implied that it was the RBA making the statement that interest rates would be lower under the Liberal party. The RBA never said, or would say, anything like it.
The RBA complained to Liberal HQ, but waited until the election was neatly out the way (and no one cared anymore) before making those complaints public.
The ‘credibility’ of monetary policy rests on the belief that the RBA is operating independently of political cycles. If that trust is broken, then the whole system (which has given us low inflation and low interest rates) would be in trouble.
So the RBA goes out of it’s way to be bland, uncontroversial, mostly boring.
And that applies to housing too.
And lot of the property doom-sayers have been pressuring the RBA to come out and say that there’s a property bubble and we’re in dire economic danger. They’ve been doing that for 15 years.
But the RBA never did. Partly because the RBA was never that worried. Hidden in pages and pages of public reports are softly-spoken statements that the RBA is actually not that uncomfortable with the level of house prices.
But the RBA also knows that markets hang on their every word. Every time Glenn speaks journos go through his words with a fine tooth comb, trying to find any hint of a change in his mood or his weathers.
So, could you imagine if Glenn said, ‘housing is over-valued’? It would create a self-fulfilling panic and property shake-down that would rattle the whole financial system.
… with just four words.
No, Glenn chooses his words very, very carefully.
That’s why I sat up and took notice last week when the RBA said they were a tad concerned about all the money from self-managed super funds that’s flowing into property.
Not that he said he’s going to do anything about it. Glenn the gunslinger is just letting us know he’s got his eye on it.
This got me wondering, what’s he seeing that we’re not. So I did a little digging in the data.
Turns out self-managed super funds (SMSFs) have grown up in the past few years. No longer the snotty nosed kid in short pants, they’re now a 500-pound gorilla. In June, SMSFs were worth an estimated $507 billion.
… that’s bigger than Westpac.
So now our mums and dads, running their own little nest egg machines, command a total pool of wealth bigger than one of our big four banks. Suddenly, what they do matters… in a big way.
Ok, so looks like Glenn’s on to something. So what about the property story?
Well, so far, SMSFs haven’t been big players in the property market. At the moment, residential property only accounts for around 3.5 percent of the total portfolio.
Well, that’s not massive. That’s about $18 billion. That’s makes them a sizeable player, but nothing over the top.
But hang on. That’s where they’re at now. But where are they going? Well, surveys suggest that SMSFs would like on average to have a much larger exposure to property – like something in the order of 30 percent.
Ok, now we’re talking serious cheese. If SMSFs followed through on that promise, they’d be throwing another $160 billion towards property. Drop a rock in the pond that big and you’re going to have some serious waves.
But wait, there’s more! Under current rules, SMSFs are allowed to leverage off other assets, and into property. So if we took a typical 70:30 gearing, we’re looking at something in the order of $350 billion.
This is big bucks.
According to the latest RP Data report, average house prices in Australia are just short of $500,000.
Well, remember that we only build about 70,000 homes a year at the moment. So we’re potentially looking at a sudden surge in demand that’s equivalent to about 10 years worth of current supply!
No wonder Glenn’s a little nervous.
In central banking, timing is everything. It’s like the dollar. The RBA doesn’t care what level it goes to. They’ll only intervene if it chops and changes to quickly – if it dives or if it spikes.
And so what’s worrying Glenn is not that SMSFs might become big holders of Aussie property. There’s no real problem with that. He’s worried about how quickly they’ll do it.
If they suddenly all jump in (which with rates as low as they are and stocks still dragging the chain, they could) you would see such a monumental surge in demand that it would tear the market apart.
And forget through the roof, it would send prices out somewhere north of Jupiter!
You could easily see prices double in less than a year I reckon…
But of course this is the extreme, fully invested, fully geared scenario. I don’t think we’ll see a price explosion quite on that scale.
But it’s going to give a big bump to prices, that’s for sure. And it’s got Glenn worried enough to send off a few warning shots.
But who’s going to stop it? Where does a 500-pound gorilla sit?
Where ever it wants to!
This is going to be something to watch!