‘A risky point in time’: Quick growth in housing prices raises concerns

Ross Greenwood speaks to Professor Richard Holden from UNSW Business as there are grave concerns about the rate at which housing prices in Sydney and Melbourne are growing, with some worried it could result in a range of issues.

Ross Greenwood: One of the issues that the Reserve Bank has sensed that the Australian Prudential Regulation Authority, that is APRA, the banking regulator are going to watch out for is property prices. Let’s be honest, housing prices bouncing back in Melbourne and Sydney as quickly as they have is not just a surprise but I would have thought is of some concern. The reason is what you don’t want is another property bubble to come as a result of record low rates and of course, all of a sudden just people taking on more debt or feeling like they’re confident enough to take on that debt simply so that they can get into the property market because there seems to be well, I don’t know, maybe some cheap pickings around the place. When I spotted today a headline in Bloomberg that said Australian property is starting to boom again, that’s a worry. Then I saw that the key person spoken to was Richard Holden, Professor of Economics at the University of New South Wales. I thought, “We’re going to have a chat with Richard.” I’ve got him on the line right now. Richard, many thanks for your time.

Interview with: Richard Holden, UNSW, Business

Richard Holden: Hi Ross. It’s good to talk to you.

Ross Greenwood: Okay. Many people out there would say this is exactly what the Reserve Bank wanted to have happen. They wanted to start to get property prices going. They felt that if property prices started to move, that retail sales could start to pick up. If retail sales start to pick up, maybe you could also get a few more houses built. If more houses are built, then there’s employment. It seems as though really always trying to rekindle Australia’s economy starts and stops with the housing market but you’re saying, “Just watch out. This is a risky point in time.” Why do you say that?

Richard Holden: I think it is a risky point in time. What you’re seeing is a massive, massive hike in house prices over the last decade or so and then, a real tightening of credit conditions in the wake of the Royal Commission and some breaches around responsible lending laws like the lawsuit against Westpac. What you saw was a big credit crunch and basically, people went from one month to the next, the same person, the same borrower, the same property, the same income, they could borrow maybe 20% less and you saw a big contraction in house prices particularly in Sydney and Melbourne. There was often an enormously high take in rate cuts by the RBA three-quarters of the potential in total, a relaxation of the regulations by APRA. You’re just seeing this hockey stick back with a massive increase in house prices and that might be good in reversing a trend into retail spending in the short-term but all the same concerns we had 18 months ago about very high household debt levels, a potential property bubble, overleveraging. They’re all just right back and squarely in the picture.

Ross Greenwood: Isn’t there a fundamental problem that if you do get that hockey stick and I do note that ANZ even last Friday we spoke to Richard Yetsenga, the chief economist there, predicting that in 12 month’s time, that Melbourne and Sydney house prices could be rising at double-digit growth from where they are right now. That again gives you a real problem or a real insight into maybe a longer-term problem and that is that interest rates effectively can never go up because that will kill off the Australian economy, the heavily indebted household sector almost in a heartbeat.

Richard Holden: That’s a really good point. The Reserve Bank may be creating a riot at their own back in terms of– At the point where they may want to encourage interest rates, they say, “Everyone’s so high when we leverage that we increase interest rates even just a little bit, we’re going to create the risk of defaults and mortgage distress.” They may be to blame a real constraint on their own interest rate activity and monetary policy activity going forward.

Ross Greenwood: Do you believe there was a better way for the Reserve Bank to act in the last little while? The Reserve Bank, like many other central banks around the world, indicated that they were very conscious about trying to have the Australian Dollar fall, to come down. One of the observations that I’ve made, I’ve even heard Philip Lowe say this, is that not every currency in the world can be low at the same time because they’re all compared against each other and maybe it was a folly to try and follow every other currency down to simply try and protect the industry.

Richard Holden: I think that’s a good point. I think there are two things I’d say there. First thing, I think the Reserve Bank were right to cut rates but not because of the currency. I think they have actually been far too slow to cut interest rates. Unemployment’s much higher than what it really could be. It’s actually growing the inflation. I’ve come to realize that it’d be too late in the– I think that this currency play’s really chasing their own tail. The currencies are all relative. The currency base is a relative phenomenon, so not everyone can be low at the same time, as you rightly point out.

We import a lot of important capital equipment much more than we used to. In the old days, you’ll import a big capital equipment, big Caterpillar trucks and digging equipment and so on. That’s still true but if you go into your local coffee shop, what’s the point-of-sale equipment? It’s an iPad that comes from the US. We purchase a lot more stuff in US Dollars than we used to and I think that’s not fully factored in. I think they were right to cut rates but what I would say is I think the credential regulator were relaxing their lending constraints saying, “Interest-only loans. We are more comfortable with that. We are going to take the constraints off that and various other things.” I think that it was very unfortunate that that went at the same time that the Reserve Bank was cutting rates and really created an open in the lending market.

Ross Greenwood: In other words, you’re saying, “These are risky times and really the boom-bust cycle under this circumstance, you might very well go back to another bust cycle at some stage in the future simply because of the speed of the turnaround.”

Richard Holden: I think that’s right. I think it’s just off to the races again with all those same concerns about the riskiness of loans, the boom-bust cycle and the inter-generational inequality that we were all worried about 18 months or two years ago.

Ross Greenwood: Tell you what, great to have on the program. Richard Holden is a professor of Economics at the University of New South Wales. You can hear his concerns there and just interesting to watch when the latest house price numbers come out in the next week or so. Richard, I appreciate your time here on the program this evening.

Richard Holden: Thanks Ross.

Image source: 2GB

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