Monthly Archives: September 2014

IMF IN 2013 WAS WARNING US

21 Nov 2013  ABC Business News in Brisbane – The International Monetary Fund has cautioned that the recent surge in Australian property prices and rising investor expectations could cause values to “overshoot”.

While the IMF does not point to a property bubble in the hot markets of Sydney, Melbourne and Brisbane, it is urging regulators to scrutinise property investment to ensure banks maintain strict lending standards.

“Attention should be paid to the risk – as in any situation where asset price inflation accelerates – that a prolonged period of rapid price growth could give rise to expectations-driven, self-reinforcing demand dynamics and price overshooting,” the IMF said in a statement.

“A sudden house price decline, were it to occur – possibly triggered by a shock to household incomes and borrowing costs – could reduce consumer confidence and impact overall economic activity.

“The authorities would need to be prepared to take preventative actions if household credit growth, transactions volume, and prices accelerate.”

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CONFIRMATION

Full credit to Australia’s ABC News for this one

The international body that represents central banks has released data that puts Australia near the top of all measures of overvalued housing.

In its latest quarterly update, the Swiss-based Bank for International Settlements (BIS) has published extensive historical analysis on historical home prices in a large number of countries for which reliable data is available.

Confirming a recent analysis by the International Monetary Fund, the BIS has found that Australian home prices are higher than they typically have been when compared to rents and incomes.

Despite having had no real (inflation adjusted) property price growth over the three years up to when the BIS figures were taken at the start of 2014, Australian homes had the equal fourth highest price-to-rent ratio and second highest price-to-income ratio.

Australian home prices were 50 per cent higher than usual relative to rents, and around 40 per cent higher than usual when compared to incomes.

“A priori, this could be a reason to expect a price correction in the future,” the report’s authors cautioned, referring to countries where prices were more than 20 per cent higher than these historical averages suggest they should be.

In the months since the figures were taken, Australian home prices have increased much faster than both rents and general consumer price inflation, meaning that they would have deviated further above these historical norms.

The BIS analysts warn that these types of price rises in already overvalued markets increase the risk of future declines, especially where wages are not growing strongly –Australia has recently had wage growth that has failed to match inflation.

“This might lead to a reversal or moderation of recent growth or a further sliding of prices,” the BIS warned.

“This argument would be more compelling for markets where prices have grown rapidly in the recent past, and where income growth is projected to be rather moderate.”

The BIS has also compiled data that look at house prices back to 1970, with Australia’s current index reading of 200 second only to Norway’s growth over the past 44 years.

Out of the 14 advanced economies examined by the BIS, only the UK has house prices that come close to matching Australia and Norway for inflation adjusted growth over that period.

Recent Reserve Bank research showed that it was likely that most Australians would be just as well off, or perhaps better off, renting than buying at current home prices.

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HERE IT COMES – ANOTHER PERSPECTIVE

Terry McCrann wrote this recently – I’ reproduced the article in full with full acknowledgement that its content belongs to Terry McCrann and the Courier Mail.  This is slowly starting to match what I’ve been saying for the last 2 or more years…

ANYONE who doesn’t believe we’ve been living through the mother of all residential property bubbles clearly hasn’t been to an auction on one of the recent Saturdays, yesterday’s still — just? — included.

Down here in Aussieland, we’ve been riding on two bubbles over the past year or so and they both derive from the absolute granddaddy of all global bubbles — the zero interest rates and the massive printing of money, led by the US and repeated pretty much across the entire developed world.

That’s zero pretty much everywhere else other than Australia and New Zealand. This has led to the bizarre and certainly unique situation that our Reserve Bank’s 2.5 per cent official rate is at the same time both too attractively low and too attractively high.

Our first bubble — in property — is because it’s “too low”. Mortgage interest rates, which are priced off that official rate, have never been as low as they are today. People are borrowing and buying.

The second bubble — in the Aussie dollar — flows from it being ‘‘too high”. All that foreign money sloshing around in global capital markets has been pouring — or being dragged by our banks — into Australia chasing our “high” interest rates.

As I noted last week, three big things happened running down to last weekend. China might just have sneezed, the European Central Bank went all the way to zero, and the US jobs numbers looked soft. This added up to interesting times ahead.

Now in the past week, we might just have seen the Aussie dollar bubble starting to pop. The really big question is if the one bubble pops, will the other follow?

In the previous week, the Aussie had seemed to defy gravity. When iron ore prices went south — China sneezing? — the Aussie actually went up, threatening to go above US94c.

This week, though, it went down one big number on Tuesday, another big number on Wednesday and kicked up only briefly on the spectacular 120,000-plus jobs number on Thursday. By Friday night, it was teetering just above US90c.

Be careful, be very careful, what you wish for. The Aussie’s clearly been too high; RBA governor Glenn Stevens wants it at about US85c or so.

That would be the opposite of the interest rate mix. At US85c it would be both not too high and not too low. Not too high as to strangle the non-resources side of the economy, not too low as to start pushing up inflation from imported goods.

Two problems, though: you can’t just dial up the desired number for the Aussie. History tells us two things: when it breaks it breaks suddenly and then goes much further than you would expect or want.

Second, an Aussie plunging would take us into new and completely unpredictable territory in terms of the global backdrop.

We have never been in this position before — with China underwriting our economic prosperity and US money-printing pouring money into the country.

So self-evidently, we have also never been in the period after they reverse. If indeed they are in the process of so doing.

If the Aussie dollar does pop, two things are likely to happen to threaten to burst the property bubble as well.

The Aussie falling means less money coming into the country chasing our “high” interest rates and direct asset purchases. It would also mean the banks would have less money or no longer as cheap money to lend. In short, not just if you’re planning an overseas holiday, but if you are planning to buy or sell property, watch the Aussie.

As for that jobs number, it was obviously and so self-evidently completely wrong. It’d be the equivalent of nearly two million jobs being created in the US in a single month — trust me, they’d think they were in a boom if they got 500,000.

There’s a much more general message out of it, which the various economists and commentators will almost certainly not learn.

This is that even “normal” monthly jobs numbers are meaningless. A figure of 121,000 looks wrong, so most commentators treated it with caution. Exactly the same applies to a figure of 21,000.

But instead, commentators will authoritatively opine that such a figure shows the economy is picking up pace, or the opposite, depending whether it’s a plus or minus.

Two things so far as policy is concerned flow from this. In Canberra, the Government needs to ditch attempts to make major changes to the budget.
It’s pretty silly politically to keep banging your ahead against a brick Senate wall.

But that aside, what the country needs is stability in government.

That leads to the second thing — once again it’ll be wise to leave management of the economy to the RBA. It can act quickly and effectively as needed.

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Now the big fellas are finally telling the truth

Thanks to the Sydney Morning Herald on 03 Sep 2014 – thanks to Georgia Wilkins

 

ANZ chairman David Gonski has warned Australia’s booming housing prices cannot go on forever and the market will eventually experience a correction.

The former Future Fund chairman said ANZ and all the big banks were “very aware of history” when it came to financial lending in the residential mortgage market.

“There will come a time when there will be a correction,” he told the Australian British Chamber of Commerce.

“The fact is, anyone who believes prices always go up is, I think, a fool.”

Mr Gonski’s comments come as the housing market heats up as spring approaches. Capital city markets had their strongest winter since before the lead up to the financial crisis, according to figures released on Monday by RP Data.

Sydney and Melbourne house prices lifted 5 per cent and 6.4 per cent respectively over the three months to the end of August. The surge represents year-on-year growth of more than 16 per cent in Sydney and almost 12 per cent in Melbourne.

Brisbane, which was one of the weaker-performing cities, recorded a 1.3 per cent property value increase in the three months to the end of August.

The Reserve Bank warned in its submission to the Financial System Inquiry that moves to boost competition in the home loan sector could increase risk in the financial system.

Regional banks, credit unions and building societies have urged the federal government to change regulations that give the big banks a significant cost advantage when making home loans.

 

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