Australia’s own east-west divide ‘House prices surge in Sydney and Melbourne and drags national index higher’ declared an ABC headline during the week.1 A data dump from Core Logic showed that there was a nationwide 0.8% increase in property values across the country. Yes, the two biggest capital cities did drag the index higher. House prices in Melbourne and Sydney were up 1.4% and 1.6% respectively. Canberra, Brisbane and Hobart all saw slightly smaller gains too. Although it’s worth nothing Perth, Darwin, Adelaide, and regional cities fell. Basically, the east coast saw house prices rise. And everything not on that side of country fell. In other words, mining related states saw property prices fall. And the more service-driven economies fared better. Making the house price ‘surge’ very lopsided. Nonetheless, Core Logic did say that the result was unexpected. Not only that, but there has been a significant jump in new mortgage approvals. Those grew 4% for July. Does this mean borrowing is back? Perhaps it is, at least for house prices. However, the overall outlook for the Aussie economy is still bleak. And The Australian pointed out yesterday that a sudden rush of new mortgages should concern investors. From the article: ‘Ultra-low interest rates and looser banking restrictions have sparked the fastest rise in mortgage lending in five years, as senior economists warn the growth risks reinflating a dangerous housing bubble.’2 Reinflating the housing bubble? I mean, surely we learnt that lesson… Senior economist at JPMorgan, Sally Auld, wonders if we did. Saying ‘it’s not really the growth we want’, adding that debt driven house price growth ‘will just make the vulnerability worse down the track’. Of course, there are some with complete confidence in banks and regulators… Famous last words… Australia is having their own Minsky moment. House prices fell 15% in total over the last 18 months. Credit-fuelled property speculation didn’t undo our banking system like in the US or Ireland. In fact two decades of risky lending practices ended, well, pleasantly. There’s been no mass foreclosures. I have no doubt banks have worked hard to keep bad debts as ‘in-house’ as possible. And second tier lenders have seen business expand as major banks had their lending criteria restricted. People who couldn’t refinance their loan with their current provider, sought out non-banks lenders with looser credit standards.3 And perhaps because there was no crash landing, people don’t realise how closely we came to nationwide financial devastation. So much so, that I believe Australia is sowing the seeds for an even bigger property bubble down the track. Although, not everyone shares my view. Take this from the Australian Financial Review yesterday: ‘Had Scott Morrison not prevailed at the ballot box, it is all but certain Labor’s policies to eliminate negative gearing and hike capital gains tax by 50 per cent would have pushed prices materially lower. ‘Yet as we look ahead, the RBA now knows that it can safely continue to chisel interest rates lower under the protective veil of APRA’s powerful suite of counter-measures that have a proven history of cauterising financial stability concerns. ‘This means that a repeat of a speculative, investor-driven bubble fuelled by loose lending is extremely unlikely.’ Let’s unpack this. I’ve written several times over the past few months that I have little faith in the regulators’ approach to keeping lending under control. For starters, Aussie house prices were able to flourish under their very watch. And their ‘protective-veil’ turns out to only be enforceable when it suits them to tackle it. APRA has recently shaken off its 7% buffer they said must be applied to all mortgages. Now, only a 2.5% buffer is needed to be applied to a mortgage loan. It should be noted that even though this 7% buffer had been in place since 2014, banks disregarded it until the spotlight of the Banking Royal Commission was on them. Then there was their laughable ‘cap’ on interest-only loans. Again, APRA put a rule in place in 2014 that no bank should have more than 30% of their mortgage book exposed to interest-only loans. But they didn’t go about enforcing that rule until the end of 2017…once the Banking Royal Commission had been confirmed. The point is, the very regulators that claimed to have a protective-veil over the property market continue to make rules, but then not back them up until caught out. Let’s not forget that our own Treasurer is calling for banks to lend again. Saying as recently as May that ‘economic and social responsibility’ to lend and ‘[Banks] must do appropriate credit checks and make decisions in the best interests of their business, but it is important at the same time credit continues to flow to the economy, both to households and businesses.’4 Put it this way. Telling a private enterprise to lend is essentially pressure from the government to tell a bank who they can and can’t lend money to. It’s one or two words away from coercion. And finally, we have ASIC — the other regulator — reviewing bank lending restrictions. The thing is, all of these recent changes build a case for looser lending in the future. And that means more money following into housing once again. This time the government is pushing it. And a repeat of a ‘speculative, investor-driven bubble fuelled by loose lending’ is highly likely. Just give it a year or two. Until next time, | | Shae Russell, Editor, The Daily Reckoning Australia | 1 ‘https://www.abc.net.au/news/2019-09-02/house-prices-surge-in-sydney-and-melbourne/11469744’ 2 ‘https://www.theaustralian.com.au/business/economics/home-loan-surge-sparks-bubble-fears/news-story/cb7b07f3e8998efd61e0e721c18f64a4’ 3 ‘https://www.smh.com.au/business/banking-and-finance/non-banks-home-loans-surge-as-banks-growth-sags-20190904-p52nw0.html’ 4 ‘https://www.afr.com/companies/financial-services/treasurer-backs-apra-buffer-change-20190522-p51q04’ |