Housing prices are a bit like the old weather quote (everyone talks about the weather but nobody seems to do much about it) with one big exception: when it’s Glenn Stevens doing the talking.
Lost in the shadows of Christmas, the Reserve Bank Governor gave his clearest guide yet to what he thinks of housing prices and where they should go. The difference with Stevens talking is that he has the power to achieve the outcome he desires, while everyone else, from Doomsday merchants to get-rich spruikers, are only talking. Most people tend to value opinions that agree with their own and therefore seek out the bullish or bearish comments they like the sound of. It’s much more important and useful to seek the opinion of someone who can move interest rates one way or the other to influence the outcome.
The last time Stevens went pointedly public on the outlook for housing prices was back in 2010 when he used an interview with David Koch on Sunrise to warn punters against thinking housing prices only go up. It was a timely warning indeed.
Now Stevens offers greater comfort for residential real estate owners who have seen values fall, but there’s not much for the speculators to get excited about as there’s no return to the bubble on offer.
As usual with the governor, his views are balanced and cautious with plenty of perspective: yes, Australian housing prices are high, but they’re not grossly overpriced or due for a crash; there indeed should be a move by investors out of cash into housing and the stock market following the interest rate cuts; the RBA will be happy to see the fall in housing prices reversed but there will be no return to the bad-old-good-old days of double digit annual rises. By implication and adding the thinking expressed in other RBA statements in recent months, it looks like our central bank wants to see housing prices rising modestly again.
But don’t take my word for this interpretation, get it from the horse’s (or governor’s) mouth. Stevens gave the Australian Financial Review a rare interview just before Christmas and, therefore, few people saw it. Aside from the AFR’s low circulation, especially during the silly season, it’s the nature of journalism that other publications tend to ignore exclusive interviews given to one of their competitors, despite relatively few people having the time, energy or inclination to read all the publications available.
Thus, unless you’re a dedicated AFR reader, you won’t have seen the following edited quotes. I’ve just chosen the bits that relate to housing prices with a little of the bigger outlook thrown in:
AFR: In your statement after the board meeting before last, you referred to the relative returns to saving. Are you actually saying that savers should think about shifting their money out of deposits into the housing market or the stockmarket?
Stevens: Well I’m not giving them advice. And people’s circumstances are all different so they will make their own decisions, but I think it was simply a recognition that this is part of the transmission process.
That it’s not intended that it be any more or any less prominent than it has always been but it is there and I think it is probably prudent to occasionally remind people that we think about not just the borrowers but also the savers. We’ve got to keep both of those in mind so the intent of that phrasing was to make those points really
AFR: As you know every pet shop galah that comes to Australia says our housing prices are too high and that may be arguable. But if you’re thinking about perhaps cash rates below 3 per cent, given that household leverage has only levelled off, are we at all vulnerable?
Stevens: My position as you know on the level of housing prices has been they are high.
I think that when you put it fully into international perspective – that is, don’t just compare with the US, compare with a whole range of countries – it’s actually a lot harder to make the case that they’re grossly overpriced and due for a crash. After all, we’ve been around this level of house prices/income for 10 years – [it’s] taking a long time to burst if it is a bubble.
So I’m not so much concerned about a crash, but as I have said also before, it’s seems to me we would be flirting with danger were we to see a very big run-up from these present levels.
Now, we have seen some gain in house prices over the past year or so that’s reversing a little bit of an earlier decline.
That doesn’t trouble me, I think that’s probably part of [the] cyclical transmission mechanism working.
But it would be, I think, troubling if you saw a return to very strong 10 to 20 per cent per year persistent rates of growth of housing prices, especially if that was accompanied by a return of rising leverage.
I think that would be a very dangerous thing to do and we would be imprudent in the extreme to preside over that.
I don’t think that’s what’s going to happen by the way – I don’t think that is what is happening and I don’t think it’s that likely because I think the household sector has worked out.
AFR: Do you need an increase in housing prices to stimulate the required increase in housing construction?
Stevens: Hard to know isn’t it, but probably one of the things that hasn’t helped confidence of builders and their lenders is the price fall and nobody wants to build an asset whose price is going down as you build it, so that’s probably not helpful as an ongoing thing and I think the fact that seems to have ended – that’s a helpful thing from a cyclical dynamic point of view of getting some more construction going.
That’s only one of other things that necessarily fall into place but as I say, I don’t think we want – and this is one of the difficulties – I think there are some people who think that good times equals strong growth in house prices and until we see that, times can’t be good.
I think we have to try to have good times that are not associated with rates of growth of house prices of that extent – modest increases are fine but these kinds of double-digit things from these levels would be puzzling and I think troubling.
AFR: You say we’ve lived with high prices for a decade. Does that say we may have to add to those prices in the new cycle and does that mean we’re one recession away from disaster?
Stevens: Well I’m not saying we want to lift the mean level of house prices to some high level in order to get cyclical recovery of construction – that’s not the way to go.
What I am saying is that some gentle reversal of a 10 or 15 per cent decline we’ve had, that’s okay, you know, that’s still stable and fluctuating around a given mean. So, I don’t want to go to the premise of that question because I don’t accept it.
AFR: Okay but does it still mean that if our prices are rather high, that we’re one recession away from some kind of disaster?
Stevens: Well, how would such a disaster unfold?
Usually people worry about the banking system coming under stress. (AFR: Unemployment and the banking system)
This is precisely what the various stress tests, including the one’s the IMF have previously spoken of and precisely what they simulate – they’re only theoretical exercises, they’re not the real thing – but those exercises are basically persistently done a few times now and have come up with the answer that the banking system would suffer a certain degree of losses but the banks would remain solvent.
Probably the worst that would happen is that they might need to get a bit of capital to make sure they remain above regulatory minimums but they don’t even go close to being insolvent, so I think a big asset price downturn usually does amplify whatever other downturn you’ve got, but we’re in as good a position as you could hope to be in to accommodate if that ever did occur and it does not seem to be occurring at the moment.
AFR: Can I just take you back to this point about the new areas of growth at low interest rates. You’ve said a number of times you’re looking for growth in non-mining investment to take up where mining investment leaves off. We’ve seen some signs of life in housing but there’s no sign of life in the capex surveys or in services and manufacturing. If that non-mining investment turns out to be a bit of a growth hole, where does the growth come from? Do we end up having to rely on a much stronger rebound in housing?
Stevens: I think we always get this question, where will the growth come from? And most of the time it comes.
On business investment, my pretty strong recollection of quite a few cycles I’ve lived through is that you get to a point where the fundamentals of that investment look okay and you’re wondering why aren’t they doing it?
And eventually they will, but quite often that is slower to show up than one would have ideally liked. That’s the nature of things.
I’m not sure if it makes sense if it is a bit slower to come through, it doesn’t make sense to stoke up other things in some effort to overly fine-tune a short-term path of the economy.
We’ve got to recognise that monetary policy has limits to fine-tuning.
We’re not going to be able to absolutely guarantee seamlessly every handover from one source of demand to another.
The economy has actually done pretty well in recent years when you think about it with all these various handovers. Private demand slowed, the government stepped in, the fiscal contraction or consolidation was scheduled to occur, the question was will mining investment pick up? It did. Now, the mining investment is going to slow, will the other pick up?
We don’t know but it’s not as though it’s completely fanciful to expect that there will be a reasonable handover there, but we can’t promise that we can fine-tune that.
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