"The decade or more up to about 2007 was unusual. It would be quite surprising, really, if the same trends – persistent strong increases in asset values, very strong growth in per capita consumption, increasing leverage, little or no saving from current income – were to re-emerge any time soon." - Glenn Stevens, RBA Governor
A common meme perpetrated by (some) property investors is that should property prices fall too far then the RBA will be standing ready to drop interest rates in order to save their skins. However contrary to this expectation Glenn Stevens (RBA Governor) has in fact warned against speculation in leveraged property over the last couple of years.
From this speech in mid 2009 Stevens spoke of the importance that low rates translates into more dwellings, not just higher prices:
Quote from speech: A very real challenge in the near term is the following: how to ensure that the ready availability and low cost of housing finance is translated into more dwellings, not just higher prices. Given the circumstances – the economy moving to a position of less than full employment, with labour shortages lessening and reduced pressure on prices for raw material inputs – this ought to be the time when we can add to the dwelling stock without a major run-up in prices. If we fail to do that – if all we end up with is higher prices and not many more dwellings – then it will be very disappointing, indeed quite disturbing. Not only would it confirm that there are serious supply-side impediments to producing one of the things that previous generations of Australians have taken for granted, namely affordable shelter, it would also pose elevated risks of problems of over-leverage and asset price deflation down the track.
Unfortunately irrational exuberance gripped first home buyers, upgraders and investors and they bid prices up to even higher ridiculous levels than we saw at the initial peak in 2007. The following boom was the result of historically low interest rates as well as the government lining first home buyers pockets with a record amount of handouts and other contributing factors such as relaxed foreign buyer (FIRB) laws.
It was clear to some that this trend was not sustainable. Seeing the record numbers of unsophisticated buyers flooding the market in 2009 (see one of my first posts on this blog for some of the statistics) was in part the reason I sold my property at the end of that year and returned to renting.
By March 2010 the unsustainable price boom must have been obvious to Glenn Stevens who made an unusual appearance on mainstream morning television in Australia to warn against leveraged property speculation:
Quote from appearance on Sunrise: I think it is a mistake to assume that a riskless, easy, guaranteed way to prosperity is just to be leveraged up into property. You know it isn't going to be that easy.
These (house) prices are getting quite high,” Mr Stevens said. “I’ve got kids that within not too many years are going to want somewhere of their own to live and you wonder how is that going to be afforded.
The above warning was probably too little too late as it almost marked the exact top of Australia's property market bubble (on a national level, some states are in different cycles e.g. Perth prices haven't really gone anywhere in around 6 years) with prices having deflated considerably since.
To try and avoid a repeat of the rampant speculation and over extension of first home buyers in 2009 Stevens is again warning property speculators that interest rates are not being lowered to aid house price growth:
Quote from speech: One thing we should not do, in my judgement, is to try to engineer a return to the boom. Many people say that we need more ‘confidence’ in the economy among both households and businesses. We do, but it has to be the right sort of confidence. The kind of confidence based on nothing more than expectations of ever-increasing housing prices, with the associated willingness to continue increasing leverage, on the assumption that this is a sure way to wealth, would not be the right kind. Unfortunately, we have been rather too prone to that misplaced optimism on occasion. You don’t have to be a believer in bubbles to think that a return to sizeable price increases and higher household gearing from still reasonably high current levels would be a risky approach. It would surely be a false basis for confidence. The intended effect of recent policy actions is certainly not to pump up speculative demand for assets. As it happens, our judgement is that the risk of re-igniting a boom in borrowing and prices is not very high, and this was a key consideration in decisions to lower interest rates over the past eight months.
Hence, I do not think we should set monetary policy to foster a renewed gearing up by households. We can help, at the margin, the process of borrowers getting their balance sheets into better shape. To the extent that softer demand conditions have resulted from households or some businesses restraining spending in an effort to get debt down, and this leads to lower inflation, our inflation targeting framework tells us to ease monetary policy. That is what we have been doing. The reduction in interest rates over the past eight months or so – 125 basis points on the cash rate and something less than that, but still quite a significant fall, in the structure of intermediaries' lending rates – will speed up, at the margin, the process of deleveraging for those who need or want to undertake it.
In saying that, of course, we cannot neglect the interests of those who live off the return from their savings and who rightly expect us to preserve the real value of those savings. Popular discussion of interest rates routinely ignores this element, focusing almost exclusively on the minority of the population – just over one-third – who occupy a dwelling they have mortgaged. The central bank has to adopt a broader focus. And to repeat, it is not our intention either to engineer a return to a housing price boom, or to overturn the current prudent habits of households. All that said, returns available to savers in deposits (with a little shopping around) remain well ahead of inflation, and have very low risk.
I suspect we are yet to see the full effects of the recent interest cuts (with potentially more to come) on the Australian housing market, but fingers crossed those most vulnerable don't succumb to over leveraging in a housing market which is still well inflated and in my opinion has some way yet to fall.