The Reserve Bank blames population growth and sluggish housing development for Australia’s property boom and bust market.
The RBA is calling out supply and demand for property as reasons for the recent swings seen in house prices — rather than credit availability or the cost of home loans.
Earlier this morning, RBA governor Philip Lowe spoke at the Australian Financial Review’s exclusive business summit.
He said property price falls seen over the last year in Sydney and Melbourne, while unusual, have actually taken place before.
‘Declines of this magnitude are unusual but they are not unprecedented,’ Dr Lowe said.
‘In 2008 and 2010, prices fell by a similar amount, as they did on two occasions in the 1980s.
‘In the 1980s, the rate of CPI inflation was higher than it is now so, in inflation-adjusted terms, the declines then were larger than the current one.’
But unlike previous declines, weaker economic conditions combined with or increasing interest rates were not the cause of current declines.
Economic conditions not to blame for property price falls
The current downturn is seated in Australia’s escalating population; now that housing supply has finally caught up with population prices are falling or more accurately correcting.
Of course, investors and homeowners alike must expect supply and demand.
‘The origins of the current correction in prices do not lie in interest rates and unemployment,’ Dr Lowe said.
‘Rather, they largely lie in the inflexibility of the supply side of the housing market in response to large shifts in population growth.’
He said low interest rates and government polices favourable to investors (think negative gearing and 50% capital tax gain discounts) did encourage dicey demand once prices were climbing, boosting these price rises, as reported by the ABC.
‘The strong demand from investors had its roots in the population dynamics,’ he argued.
‘Low interest rates and favourable tax treatment added to the attraction of investing in an appreciating asset.’
Tight lending Standards, not as bad for on Property prices
However, Dr Lowe toned down the effects of tougher lending practices, of which many analysts credited to the drop in housing prices.
The ABC reported the following from his presentation;
‘The RBA’s liaison suggests that, on average, the maximum loan size offered to new borrowers has fallen by around 20 per cent since 2015,’ he said.
‘Even so, only around 10 per cent of people borrow the maximum they are offered.
‘Sensibly, most people borrow less than what they are offered, so the effect of this reduction in borrowing capacity has not been particularly large.’
He also said he believed the banks took the narrowing of their home loan application processes too far.
‘Over recent times, the number of people reporting that an investment in real estate is the wisest place for their savings has fallen significantly. So, it is not surprising that there are fewer investors in the market.’
He also notes how the number of people believing it is the correct time to buy a house has increased, which should hopefully stabilise the market.
Housing market declines impact on economy
According to the ABC, the impact of the housing market will have an effect on Australia’s economy.
Mr Lowe said the RBA was particularly concerned with how falling house prices may influence consumer spending, which makes up 60% of the economy.
‘They estimate that a 10 per cent increase in net housing wealth raises the level of consumption by around 0.75 per cent in the short run and by 1.5 per cent in the longer run,’ Lowe revealed.
‘They find that it is highest for spending on motor vehicles and household furnishings and that for many other types of spending the effect is not significantly different from zero.’
Gabriel Sterne, Head of macro research at Oxford’s School of Economics supported Lowe’s claim, who addressed an exclusive breakfast at the Business Summit, as reported by the Australian Financial review.
He said that housing wealth would have a limited effect on the economy, arguing falling houses shouldn’t be a threat.
‘The banks are going to be OK, I don’t think the housing wealth effect is going to be very big, so you just need a live with lower house prices — which might not be a bad thing,’ he said.
He also pointed out that being 28 years recession free doesn’t necessarily mean Australia is any more likely to experience another one.
Instead, he suggested data saw that an economy is most sensitive to a recession closer to the start of a cycle, where the eighth, ninth and 10th year of an expansion in the cycle are the safest point. Stability is not lessened by lengthier cycle run.
So what can we take from Lowe’s address to AFR?
The Reserve Bank is seriously considering the ability of both Australia’s economy and financial system to ensure a severe crash in house prices doesn’t happen — on par with the experience in the United Stated during the Global Financial Crisis.
For Money Morning
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