Australian mortgage wars and battles

Wednesday, 17 November 2021 — Albert Park

[2 min read]

Well, looky here.

RBA Head Windbag in Chief, Philip Lowe, appears in the Australian Financial Review repudiating the idea that they will raise the cash rate next year.

He blows:

‘I sometimes read that we’re going to increase interest rates to stamp out rises in house prices…

‘We’re not going to do that — that’s not in our current reaction function.’

Reaction function? What the gobbledegook that is supposed to mean, I can only guess.

But I suppose we can infer that it describes the RBA as exactly as it is: reactive.

And yet people look to them for leadership and guidance.

Oh…hee hee…I’m holding my stomach…those poor fools.

As if the RBA is ever going to lay out what you need to know.

It was only about two months ago they were quite certain they would not need to raise rates before 2024.

The market says otherwise.

Hmm.

Whom to believe?

Let’s see…

We have a bunch of overpaid bureaucrats in an institution that missed the collapse of 2008 and blew Sydney and Melbourne house prices sky-high between 2012–17.

And then, we have the diverse group of participants — the market — risking their reputation and money and being held responsible for the outcome.

I’ll go with the market every time.

The one caveat to this, of course, is that the RBA controls the printing press.

It is often said that the market controls the long end of the yield curve.

This is not so true these days. That’s part of the point of QE.

The market can try and force rates up…but QE gives the central banks the means to push them back down with newly created dollars.

That means a world of financial repression. Inflation will erode the real value of savings and debt.

And the Head Windbag is going to let property inflate.

The RBA can let someone else take the blame for the inevitable disaster down the road because it’s not part of his ‘reaction function’.

Yet the market, right now, is fearful someone will grow a pair and do something about it.

It’s not the RBA. It’s APRA — the prudential regulator.

The journo with a great name like a colonial bushranger — Clancy Yeates — wrote recently for The Age:

‘The Australian Prudential Regulation Authority (APRA) is preparing banks for the possibility of tougher curbs on mortgage lending, saying it could impose limits on higher-risk loans if they raised risks for the financial system.

‘As regulators mull further action to rein in the housing boom, APRA on Thursday provided more details on the potential steps it could take to force banks to dampen housing market risks.’

The market has gone into wait-and-see mode here.

I think they may tinker around the edges, without putting a big lockdown on the sector.

It could be a grave risk to the recovery to cut off the free flow of lending.

That would be ambitious, considering we already have the uncertainty around the federal election next year.

Then we have to watch for the market response to get around the rules.

For years I worked with a man who studied property cycles most intently.

One thing stuck out from history like the proverbial.

The market finds a way around any restrictions imposed through regulation.

There’s simply too much profit involved.

One can’t help but look to the crypto market to see where it could head.

I can offer no proof yet. But I expect some form of mortgage financing to appear there…

And APRA will have no jurisdiction over it.

Not something to expect today or tomorrow.

But 2023 or 2024?

Stay tuned!

Best wishes,

Callum Newman,
Editor, The Daily Reckoning Australia