Australia's Housing Bubble gets bigger, Reserve Bank prepares to blame Trump - Lindsay David
Former Goldman Sachs Banker and PM Malcolm Turnbull has made US President- elect Donald Trump the scapegoat for his own Prime Ministerial neglect. db
Despite early indications that some housing markets in the mining states will hit the skids, the Australian mortgage-financed housing bubble continues to grow. The Reserve Bank of Australia is pushing to find a scapegoat to lay blame for economic challenges that may arise within the Australian economy. That scapegoat is the US president-elect, Donald Trump.
Today’s reality indicates the housing bubble is a serious issue, amplified by the RBA cutting the cash rate too low. This, combined with evidence of our financial system’s poor and highly questionable lending standards to homeowners and property investors, which regulators and government refuse to acknowledge, is a financial disaster in the making.
The impact of Trump winning the US election has sent mixed signals for the global economy. For the RBA, the challenge of a Trump presidency is Washington’s potential shift to protectionism on the back of what could be a significant and much-needed makeover of the country’s transportation infrastructure. Hence, Trump’s policies may be inflationary for the real economy.
The post-Trump election bounce in US bond yields has already fed into an increase in borrowing costs in Australia. At the same time, wage growth languishes in its lowest spell since the second world war and households are struggling under a gigantic debt burden of more than $2tn dollars.
Rising bond yields mean that the government or banks have to pay a higher yield (interest rate) to borrow money because the market is starting either to demand greater reward for risk – or to combat real economy inflation in a nation that has its banking and household sectors already highly leveraged. That is a significant challenge for any highly leveraged asset class that has overshot the runway. Australian property is one such asset.
Higher lending rates in Australia may dent one of the largest residential construction booms in modern western history – evidenced by the staggering crane count, outnumbering major cities in the US and Canada. So far, it has defied gravity purely through the continuous expansion of leverage.
The boom occurring in the eastern capital cities was not orchestrated by Trump. It was, however, led by the executives at the RBA without meaningful evidence as to why Sydney, Melbourne or Brisbane need all these new high-rise apartments in the first place when rental yields have crashed.
At his maiden parliamentary hearing as the RBA governor in September, Philip Lowe denied that low interest rates and large mortgage growth were primary factors driving Australia’s historical high and rising housing prices. Instead, he argued the lack of homes was a major cause of our high housing prices.
For Lowe’s shortage theory to hold true, rental incomes would have risen significantly. If there is a limited supply in housing, you would also find the rise in the cost of renting significantly outpacing the rise in household income. Outside of the GFC (a one-off shift when Kevin Rudd opened the floodgates to foreign students) and locations affected by the mining sector boom, rent growth has been anaemic. Indeed, rents have not even kept up with wage growth.
A chart showing Australian house prices, household income, rents, GDP per capita, construction costs and population over the 30 years from 1986 to 2016 based on ABS data. Photograph: LF Economics
In Australia’s case, as the chart above suggests, housing price growth has outstripped all other factors including rents and household income, hence the rental yields have fallen over the years. As recent history tells us, there is no greater giveaway that a housing market is experiencing a debt-fuelled bubble than a market with ever-compressing rental yields and ever-expanding household liabilities.
It appears the RBA is ready to lay blame on Trump’s expected departure from decades of mainstream economic policy rather than accept accountability for the conditions it has helped stoke in the housing and mortgage markets. Australia has accumulated (ratio-wise) the highest or close to the highest level of household debt in the world – recklessly accumulated under Lowe’s watch as deputy governor and now governor.
The Australian bubble was not orchestrated by Trump but by a team of highly paid central bankers who have assisted in turning our housing market and futures into a leveraged casino seemingly for the benefit of banks (whom without public debate the RBA has committed $300bn for a bank bailout facility), property developers, and landowners.
With household debt continuing to grow at about double the rate of nominal GDP and household income, it is clear Lowe and the RBA have no plan to deal with this colossal hobgoblin in our own backyard. If the Australian economy ends up like that of the US or Ireland after the GFC, RBA chiefs have no one to blame but themselves and will not be able to use the oft-employed excuse: “We didn’t see it coming.”
Housing inequality is a failure to govern, and the market is not the answer