After a fruitless attempt to talk down the high Australian dollar, Glenn Stevens has today embarked on a new project – talking down house prices.
The jawboning comes after overwhelming evidence suggests Australia’s property bubble, already one of the biggest bubbles in the world, is accelerating out of control fuelled by record low interest rates.
It has put the central bank in quite a bind, with one hopeless instrument – the official cash rate – to manage inflation, booming housing prices, the excessively high Aussie dollar and surging unemployment. You could easily call it mission impossible.
Increasing interest rates at this point in time to combat the frothing property market, would cause an appreciation in the dollar, exposing trade exposed industries to even more heartache. For much of the past year, Stevens has been trying to talk down the Australian dollar – all in vain.
It would seem sensible for the bank to embark on macro-prudential controls, but the central bank has conveyed its belief it would cause distortions in the market – probably insignificant to the current distortion. The comments sound synonymous with a Q&A session in 2012 when the then Prime Minister Julia Gillard suggested you couldn’t remove negative gearing, as doing so would create distortions in the property market.
Today, Stevens said the bank was unable to further drop interest rates to cushion our faltering economy due to our housing bubble:
In our efforts to stimulate growth in the real economy, we don’t want to foster too much build-up of risk in the financial sector, such that people are over-extended. That could leave the economy exposed to nasty shocks in the future. The more prudent approach is to try to avoid, so far as we can, that particular boom-bust cycle. It is stating the obvious that at present, while we may desire to see a faster reduction in the rate of unemployment, further inflating an already elevated level of housing prices seems an unwise route to try to achieve that.
Stevens is not the only banker ring alarm bells. ANZ chairman David Gonski said yesterday that a correction in Australia’s housing market is inevitable. He said banks “are very aware of history. They know that you can have the growth in prices that we have had and over time and there will be a correction,”
“But the fact is anybody who believes that prices will always go up is a fool,” remarked Gonski.
Ratings agency Moody’s has warned our banks are writing more risky loans with the proportion of investor loans, interest only loans and subprime loans increasing. An analyst for Moody’s, Robert Baldi, even went as far as saying “Australia is out there at the front of the market” in issuing subprime loans. Moody’s senior credit officer Ilya Serov said “The increase in higher-risk lending is credit negative for Australian banks because it weakens the credit quality of their portfolios,”
Ex Commonwealth Bank of Australia CEO and now chairman of the Financial System Inquiry, David Murray, warns real estate is now the biggest risk to the Australian economy.
Two weeks ago, the United Nations warned the Australian housing asset bubble need to be “closely monitored.”
» RBA’s Glenn Stevens urges action to avoid property ‘bust’ – The Australian Finacial Review, 3rd September 2014.
» RBA governor Stevens: ‘Unwise’ to further boost ‘elevated housing prices’ – The ABC, 3rd September 2014.
» RBA’s Glenn Stevens ramps up warning over property investment – The Australian, 3rd September 2014.
» RBA governor Glenn Stevens warns of housing bubble risk – The Sydney Morning Herald, 3rd September 2014.
» House price correction inevitable, warns David Gonski – The Australian, 2nd September 2014.
» UN report warns of asset bubble in housing – The Age, 19th August 2014.
» Moody’s warns on rising bank home loan risks – The ABC, 2nd September 2014.
» Australia ‘at the front’ of growing subprime mortgage market – The ABC, 26th August 2014.
» Moody’s issues Aust bank warning – Business Spectator, 2nd September 2014.