Lean on bubbles before they get too big? – Too Late.

December 11, 2012 admin Australian Economy, Australian Housing 27

Papers published today from the Property Market and Financial Stability conference held in August reveal Reserve Bank Governor Glenn Stevens opened the conference with remarks on if central banks should lean on asset bubbles before they get too big and out of control.

Using momentary policy to put downwards pressure on asset bubbles as they grow could affect growth in other sectors, but no action could cause pronounced instability and far greater consequences if left unchecked. Such is the case Australia faces now.

“I would have thought that by this point we have to conclude that simply expecting to clean up after the credit boom is not sufficient anymore; the mess might be so large that monetary policy ends up not being able to do the job when the time comes” remarked Stevens in August when the cash rate was 3.50 per cent.

Since the conference, the cash rate has been reduced to an equal low of 3.00 per cent last recorded at the heights of the GFC. Even at record lows, little life can be seen in Australia’s residential property market as it comes to grips with exuberant household debt levels. Credit growth for residential mortgages continue to trend down to levels exceeding that of any records started 35 years ago. Economists expect the cash rate could reach 2.50 per cent next year. Some countries were forced to introduce quantitative easing (QE) and zero interest rate policy (ZIRP) settings after their large, unchecked housing asset bubbles started to correct.

Stevens continued, “Moreover, if the monetary policy clean-up after the asset price bust involves interest rates low enough to prompt some other sector of the economy to leverage up in order to spur the growth, then the clean-up itself might leave its own toxic consequences.”

With deposit income quickly becoming eroded, investors are turning to higher yielding “safety” equities prompting some to call a “safety bubble.” It appears the Reserve Bank of Australia are only too aware what the consequences are if the cash rate continues to fall to cushion the fallout of our housing asset bubble.

» Opening Remarks – Property Markets and Financial Stability, 20-21 August 2012 – The Reserve Bank of Australia, 11th December 2012.




27 Comments

  1. I can’t see leaning on an asset bubble in Australia would do much good. As soon as the government believed house asset price growth was falling it would have been crikey – we need a new grant.

  2. I think the line “It appears the Reserve Bank of Australia to only too aware…” should have an “are” after the word Australia.

    Also, it seems that the asset bubble has gotten so big that there just seems to be nowhere to go but down. Hopefully things ease out slowly but looking to history that’s not the way most of these things seem to turn out.

    Question for another post maybe, but what would you recommend the government do to help (if anything) this current situation we’re all in?

  3. @Mortgage Mutilator

    What should the government do?

    Simple, what government SHOULD always do. Provide a stable political system, which creates a peaceful society where business is fully supported with minimal red tape and a simple and supportive Industrial Relations policy.

    Will we get this in Australia? Not on your nelly, governments at all levels have ramped up too much debt to provide the justice and police systems needed. Hell, we cancelled building a jail in SA, so we could get a “modern sporting facility”.

    It’s a sad joke trying to operate a business in Australia. We have abundant minerals and energy resources, but are left with only a few profitable mines. By taxing resources and energy, we have effectively taken the best player on the team and strapped them down with weights, in the name of making the team feel better (wealth distribution).

    I’ve been saying for years, that at some stage the Australian economy and society in general will snap and resort to what is required (in terms of industrial relations policy and taxation), but the change to occur is getting bigger and bigger almost daily.

    Politicians, by bowing down to the electorates wants, has effectively ensured, that when this change occurs the middle class will be wiped out, the few smart money types will be richer than ever, and the poorer end of society will be stuck in an economy with low incomes, high unemployment and a terrible society (in terms of crime and services).

    We nearly had it all, but through it away by pushing personal debt to the ceiling, making business difficult to do, and getting to soft in general, then supported this by electing the worst Australian government of all time to do the exact same thing at a federal and international level.

    If you want to avoid being caught in the down draft that is accelerating, now is not too late to make a better future for yourself. This is what I’ve done/doing.
    1: Eradicate all bad debt, ie. unproductive debt.
    2: Hold assets that will fair best for the future, no assets that rely on debt to hold value ie. property, gear funds, negatively geared property etc.
    3: Create and protect cash stock pile, ensuring that it is held in a government guaranteed institution. No funky, promise the world type organisations.
    4: Develop the skills to create an income from nothing, ie start business, learn to sell anything,

    #4: Is the hardest, it meant quitting my job, no income for next to 2 years at a stage in my life when it was the “dumbest” thing to do.

    These days I don’t rely on anyone: No company to gather enough work to keep me employed, no government agency (although this has always been the case). Ironic, that now it is the government that relies on me to earn gst and income tax for my staff to bank roll them.

  4. Before you can fight an asset bubble, you have to admit you have one.

    We currently have a huge one, but everyone, bar a small minority, are in complete denial (or maybe just too dumb to understand?)

    China’s growth in year-on-year exports collapsed during November
    Previous 11.6 Forecast 9.00 Actual 2.9
    And Imports have faded too.

    Previous 2.4 Forecast 2.00 Actual 0

    So if the Aus mining industry is feeling gutted now, there’s a lot more to come.

    Work colleague knows three people who were made redundant last week. Not trying to be flippant, as all this comes at a personal cost to people, but I can’t see any of them upsizing to a new house in the next 5 years, can you?

    Good luck

  5. Let me kick-start with a thought. Feel free to critize it.
    Options:
    1) Initiate government-sponsored building of Apartment complex.
    It will not be lavish but enough to meet basic standard of living (Want a nice and cute? Japan. Enough to get by? Singapore).

    It has to be done FAST before the “engineered” bubble burst. Wen it does, it simply a transfer of people from house-type dwelling, which takes more land space, to a shoes-box-type dwelling. My definition of fast is less than a year. Can’t be done? Come on … China did it ….

    Specify that it is only for rent with price-fixing determine by their tax-threshold (or a variant) AND it is only for people that do not already concurrently own a property. This will put a limit on the population targeted for those that just left home, being hit by the “market” (earthquake etc) or newly arrived migrants / qualified refugees. Rationale? You can’t simply increase people-intake into the market without an infrastructure or an economy to support it anyway ….

    This will (temporarily) maintain employment in the construction sector. Skill-shortage? I don’t think so …. The last time I check that changing one light bulb actually costs > $100. Yeah, one pay to get the “technician” CERTIFIED ….

    2) Continue with the bubble.
    Give more grant. Lower the interest rate to save the other “side” of the economy but the bank does not pass down the full rate though …. So who is in the WIN-LOSE situation?

    3) Specify a wide space for building tent (yeah, like in the war zone).
    The last time I check the public services (like toilets, location etc) are appaling ….

  6. I’m having a little trouble with the message of “lean on bubbles” while dropping interest rates to record lows.

    It’s also interesting that we elect people to run the government but have zero input into the management of the economy. I do believe it’s time to end the little central bank dictatorship run by ex-bankers and hold them accountable to the people.

    F*ck their “independence”. They all need to have their collective cocks slapped into the dirt.

  7. Stevens continued, “Moreover, if the monetary policy clean-up after the asset price bust involves interest rates low enough to prompt some other sector of the economy to leverage up in order to spur the growth, then the clean-up itself might leave its own toxic consequences.”

    Seriously… Stevens is just getting this now? It appears he hadn’t thought of this before the current crisis? Incredible.

  8. @Matty
    VERY VERY sound practical advice.

    I continue to be amazed at the lack of economic analysis in our press – and I’m excluding The Daily Trash from that group.

    We have an upcoming train wreck and everyone seems to be wandering around oblivious, we have learned nothing from the GFC and yet things can and will get worse.

    We have one of the largest levels of debt in the world, we have an aging population (pensions and healthcare) with changing demographics (save not spend), we have (will have) a growing Federal and State Govt deficit that will require cuts and our white knight (China) is s.l.o.w.i.n.g

    But that’s ok – lets ramp up the credit card debt, purchase that mcmansion, leverage into an investment property and hope like hell we still have a job to go to (5.3% unemployment – HA) – because the RBA and Govt(s) have everything under control.

    As to housing prices – they cannot grow at 5-7% per annum without equivalent GDP growth – who will pay the rent and mortgages in 10 years time? The answer is it wont – the RBA is only engineering a dead cat bounce and we can expect property to continue a real value decline over the next 5-0 years.

    Meanwhile Stevens seems to have had his AH-HA moment – the question is what is he going to do about it??

  9. are we in a recession?

    I know technically we havent had 2 negative quarters … but it sure feels like it.

  11. @AverageBloke – Victoria and Tasmania are officially in recession. Looking at quarterly state final demand figures it doesn’t look good, Victoria is down -0.2%, Queensland -1.6%, South Australia -3.2%, Tasmania -1.5%, Northern Territory -2.9%

    ROFL @ the “Property Professor” – news limited hits a new low, I haven’t heard that level of spruking since the 2003 boom when the front of the paper had straight line graphs showing property prices in 2012 would be in the multimillions.

  12. I happened to be in the states at the beginning of the GFC and the articles were all calling for huge property increases due to such high levels of immigration. There forecasting seemed pretty similar to what were seeing in the media now. A few months later looked what happened… We seem to be going down the same path and trying to squeeze every last cent from naive first home buyers and investors. The high dollar is slowly killing our economy and most are none the wiser. I am very concerned for those being sucked into the Ponzi scheme with high expectations and little to no accountability for their impending financial ruin. The drop will hurt the next generations for years!

  13. We are getting the impression that this summer will be the last one before “The Great Correction” in property prices.

    Never before have we had so many cold calls from RE Agencies (many of which we’d never contacted in the past!) and just look at the major price reductions right now – in what is generally the peak annual selling season.

    Let’s see what happens over Christmas. Lets see just how good or bad the real consumer economy is then. We’re rather expecting “bad” rather than “good” at this stage.

  14. I just can’t see a significant crash event happening without changes being made to NG. There is a massive industry built around tax breaks on Investment Property and with a Labor Government to scared to even mention the words ‘Negative Gearing’ all I can predict is a slow melt of the property market.

    Thoughts?

  15. @AverageBloke. I think it will depend on how intelligent our investors are in Australia. If they understand how negative gearing works, then this is likely to accelerate the crash, they won’t won’t to subsidise the living costs of their tenants while booking a severe capital loss. If they don’t understand negative gearing, and I suspect that is the majority of them, then they will be happy to continue to subsidise their tenants. Further evidence of the later is they believe Australia is different and what has happened overseas can’t possibly happen here. Otherwise, they would have been bailing out five years ago when they got wind of what is about to happen.

  16. “Remember all you need to do is find well dressed people pushing prams and lots of small black BMW’s and Audi’s.”
    –AverageBloke

    Forgot to add their leased Beemers and fresh chothes are thanks to Government handouts for childcare, baby bonus, innoculation payments, Government school payments, negative gearing all from our bloody income tax!!!

  17. Fooey, as you say is 100% correct, a small jump in unemployment will have massive effects on the current financial situation in Australia as so much of it is government subsidised, take away the revenue, and all that private debt becomes public……KABOOM!!!…..Immediate pop.

  22. ECONOMIC COLLAPSE IS COMING

    US current debt is over 17 trillion dollars and rising, the US has been printing money 4 times now with no impact – http://www.youtube.com/watch?v=ShLOM5Acgh0

    GFC explained – http://www.youtube.com/watch?v=qqUGoVez8xg

    Tony Robbins explaining – http://www.youtube.com/watch?v=TRaLytkf6vU

    Robert Kiyosaki – economic collapse BY 2016, buy silver and gold – http://www.youtube.com/watch?v=FkJ9sMDkwto

    Peter Schiff – predicted first crash – QE is quantitive easing or printing money – http://www.youtube.com/watch?v=H_ZkwlLaJyw

  24. Swanny would rather drive the budget into deficit than tackle the overly generous Negative Gearing Tax Break for property speculators.

  25. Swann, what a joke he is. Totally agree with you AverageBloke. I remember Gordon Brown standing up in parliament bragging about 50 months of consecutive economic growth before he became prime minister under Labor Gvt in UK. Where is he now.
    Unfortunately the same is happening here.

    Has anyone seen how many properties are for sale in Sunshine Coast. Every man and his dog offloading their holiday houses. Not even negative gearing is helping them keep them as a sustainable investment.

  26. Just signed a three year lease on a house that I wouldn’t have a hope in hell of affording if I’d wanted to buy it. Gonna stash the cash and grab myself a ‘fairly-priced’ house in 2015/16. Meanwhile I, like so many of my friends with savings and a well-paid career, are on strike as far as buying property is concerned. More people are wising up – shame the government can’t!

  27. Having experienced the Celtic Tiger Property Boom and Bust in Ireland i hope Australia doesn’t go through the same pain. Lives have been ruined in Ireland because of negative equity. Having just returned from Brisbane, I think Australia is now heading that way. Jobs are becoming scarce in Queensland. Your government squandered the good times and never saved for a rainy day, just like all governments…….idiots

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