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Treasury Hand-Wringing on House Prices

The FOI desk at The Australian uncovered the following, which it then beats-up into ‘Treasury warning on home bubble’:

Phil Garton, the manager of Treasury’s Macro Financial Linkages Unit, sent colleagues a draft paper on the rise in household debt, prospects for further growth in the debt-to-income ratio and the potential implications of slower household debt growth.

His email prompted an exchange with Steve Morling, currently the general manager of the Domestic Economy Division, who argued the paper should “make a bit more about the risks”.

“The elephant in the room is house prices or more specifically the risk of a precipitous drop in them, perhaps from an external shock [SK: didn’t we just have one of those?] or perhaps from their own internal dynamics when affordability constraints or capacity debt levels see prices and expectations of house prices start to move in the opposite direction,” Mr Morling wrote on June 15.

“(I) know there are very supportive fundamentals, but prices rose by 50-60 per cent in three to four years in the early part of this decade, with largely unchanged fundamentals, so they can have a life of their own.

“And given what’s happened elsewhere I’m far less sanguine about this - and the interplay with debt - than in the past.”

Mr Garton agreed that there would be risks if the fundamentals of low interest rates, unemployment, and financial deregulation “reversed significantly”. But he maintained the price growth in the early 2000s was based on a “lagged response” to improvements in the fundamentals, and questioned how Australia could have maintained a bubble for more than six years.

Mr Morling said other bubbles had lasted that long, and the fundamentals were often used to justify price rises - including in Britain where a debate over lack of supply drove property prices higher “before the British property bubble burst”.

“(I) think price expectations can take over from the fundamental drivers that you have identified for extended periods, including generating house price falls,” he wrote.

The only remarkable thing about this analysis is how pedestrian it is. It’s not much better than the kind of hand-wringing you would expect from the writers at left-wing scandal sheet Crikey, who have long viewed the Australian housing market as an anti-capitalist morality play that can only have one ending.

Asked for reaction, the Treasurer’s office had this to say:

it is the considered position of the Treasurer and the Treasury that our housing market reflects the fundamentals of supply and demand and not a bubble - specifically that Australia is simply not building enough new houses.

Not that they will do anything about it.

posted on 20 November 2010 by skirchner in Economics, House Prices

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Comments

To be fair, there is not a lot the federal government can do about State/Territory government land use regulation, which is the base problem.

The Unconventional Economist has more to say on the “it’s a bubble” line here
http://www.unconventionaleconomist.com/2010/11/australian-treasury-calls-housing.html

Posted by Lorenzo  on  11/20  at  01:05 PM


The amount of times I see a graph comparing Australia’s growth in house prices with the OECD average is ridiculous. As a metric, it is worthless. But that is about the depth of most analysis.

Posted by .(JavaScript must be enabled to view this email address)  on  11/21  at  09:43 PM


Seeing as I’m not allowed to comment at Chris Joye’s blog I’ll comment here.

Chris says:

Idiots will tell you that this means house prices are going to fall 20-40%. There is not a snowball’s chance in hell that will happen. What people forget is policy endogeneity: the RBA is hardly going to trigger the collapse of our banking system in order to keep inflation within its 2-3% pa target band.

Isn’t that precisely what happened in the US during 2005-06?  The Fed hiked aggressively during this period (presumably to control inflation) which ultimately precipitated a collapse of the US banking system.  If rates were held around 1% right through from 2004 until today, I doubt the financial crisis would have happened (yet).  We’d currently be in the midst of a much larger housing bubble.

Go back and read Bernanke’s prognostications from the 2006-2007 period.  He said problems in the mortgage market were “contained” to sub-prime.  The authorities did not see the crisis coming.

Equally, Australian authorities see no crisis ahead for our deeply indebted homeowners, in an economy that has become highly leveraged to the China boom.

This chart illustrates just how dependent on China we have become.

Posted by .(JavaScript must be enabled to view this email address)  on  11/21  at  10:38 PM


The RBA tells Chris Joye and the supply-siders how it is.

http://www.theaustralian.com.au/business/property/rba-intervened-to-avert-housing-slump/story-e6frg9gx-1225958005881

A year ago, Rismark International managing director Christopher Joye emailed RBA head of financial stability Luci Ellis, and head of economic analysis Anthony Richards, to welcome RBA governor Glenn Stevens’s public statements that supply-side problems were contributing to price rises. Having long argued that prices had been driven higher by a lack of greenfield sites and poor planning decisions, Mr Joye took some delight in the fact the RBA had “jump(ed) on the supply-side bandwagon”—after using a submission to a 2004 Productivity Commission inquiry to comprehensively reject the theory.

Ms Ellis, in a private email to Mr Richards and several colleagues, insisted there was no evidence the boom in the early part of the decade was caused by changes in supply-side conditions, more the price and availability of credit.

Even if Australia had lifted supply-side restrictions, she said, and “became Phoenix or Las Vegas”, there would still be significant price cycles. “The people pointing to supply-side factors really believed at the time that if only these supply restrictions didn’t exist, prices would not have risen quickly. This is just rubbish, and we said so. Had we not ‘killed’ this debate (not that we did), some rather worse public policy outcomes would have occurred including bad environmental and traffic congestion outcomes, and more importantly, a housing supply overhang when the credit boom went away.”

Ms Ellis, who, like Mr Stevens and Wayne Swan, has pointed to the more recent contribution of supply-side issues to higher prices, believes government restraint on housing supply helped avoid a US-style slump.

Mr Joye criticised Mr Stevens for his “unconditional” claim that local housing is very “expensive by international standards”. Ms Ellis agreed with Mr Joye that local housing stock differed from the rest of the world and comparisons were dangerous. Six months earlier, she warned the RBA against statements that supply was more of a problem than demand and “housing would be affordable if only those nasty supply restrictions were abolished”.

Posted by .(JavaScript must be enabled to view this email address)  on  11/21  at  10:58 PM


Doesn’t seem too contentious to me. Both Chris Joye and the RBA agree on price cycles but disagree on the primary drivers in this case.

Posted by .(JavaScript must be enabled to view this email address)  on  11/21  at  11:21 PM


Not what Luci was saying in her 2006 RBA RDP, that it was the combination of increased leverage on the demand-side meeting with an inflexible supply-side.

Posted by skirchner  on  11/21  at  11:56 PM


Lorenzo, the Commonwealth and the states could jointly raise the GST rate and buy the states out of stamp duty. That would unlock alot of supply.

Posted by skirchner  on  11/21  at  11:58 PM


At least Luci can acknowledge that the demand side has a role to play.

Posted by .(JavaScript must be enabled to view this email address)  on  11/22  at  12:01 AM


Takes both sides to make a price, but what side can governments actually do something positive about? The solutions are necessarily supply-side.

Posted by skirchner  on  11/22  at  01:07 AM


Lorenzo, the Commonwealth and the states could jointly raise the GST rate and buy the states out of stamp duty. That would unlock alot of supply. Would it? It would not increase the area “released” for land use.

Isn’t that precisely what happened in the US during 2005-06? Yes, but there are significant differences in the cases. The Commonwealth is not intervening to widen and weaken loan requirements in the way the US Feds did, folk cannot just walk away from mortgages, the RBA is not turning on the money pump and our competitive jurisdictions do not work in the same way. In the US you get both California/British style land use control and German/Texan open land use. Here in Oz, it is all just California/British land use control.

Posted by Lorenzo  on  11/22  at  10:32 AM


This chart illustrates just how dependent on China we have become. Surely that is simply telling us that our export spread has become more diversified across countries, not less.

Our housing market prices are clearly being driven by expectations of future capital growth not driven by expectations of future income growth from those assets. If those expectations of such “freestanding” future capital growth go away, then a “significant price correction” is likely, but we have no way of knowing if and when that is going to occur.

Posted by Lorenzo  on  11/22  at  07:43 PM


Also, is not concern about credit availability a “supply side” concern?

Posted by Lorenzo  on  11/23  at  01:31 AM


Takes both sides to make a price, but what side can governments actually do something positive about? The solutions are necessarily supply-side.

Surely it was the demand side that went haywire in the US in the mid-noughties?  GSEs +securitisation = NINJA loans.  The supply-side was never a problem in the US, and now all of a sudden Aussie real estate agents are saying there’s a 40 per cent over-supply of property.  It does seem like these “shortages” vanish very quickly after a few interest rate hikes!

Surely that is simply telling us that our export spread has become more diversified across countries, not less.

The RBA says...

Today, Australia’s top goods export destinations are, in order, China, Japan, Korea and India – accounting for some 58 per cent – followed at some distance by the United States, New Zealand and the euro area, all closely bunched, accounting for a further 13 per cent or so between them.

China’s share of our exports has gone from 5% to 23% in ten years.  The RBA anticipates another 20 years of booming resources demand from Asia.  If that happens our export trade will look something like this:  60% China, 35% Rest-of-Asia, 5% Rest-of-world.  By then Clive Palmer will richer than God, and the rest of us will be on welfare supported by his taxes.

Posted by .(JavaScript must be enabled to view this email address)  on  11/23  at  12:28 PM


“By then Clive Palmer will richer than God, and the rest of us will be on welfare supported by his taxes.”

Sounds good to me!

The secular downtrend in real commodity prices will ultimately reassert itself, largely on the back of increased volumes out of Australia. We either win on volumes or win on prices. So cheer-up, David! Life’s good.

Posted by skirchner  on  11/24  at  03:50 AM


Yeah, what happened to Julian Simon’s secular downtrend in commodity prices?  I haven’t seen much of that since the turn of the century.

I’ve read about the coming glut of iron ore.  Not seeing much of that in the market recently.  Commodities down across-the-board this week, but iron ore keeps climbing.

BTW, we won’t be winners.  Twiggy might be, and Clive might be, but not us.  Your university will struggle for funding as foreign student income evaporates, and I’ll be whacked with an Aussie dollar heading into the stratosphere.

My fantasy outcome: New iron ore capacity comes online just as the Chinese economy goes into meltdown.  We “lose” on volume and prices ... at least for a while.

Posted by .(JavaScript must be enabled to view this email address)  on  11/24  at  12:38 PM



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