Another frisson of disquiet rippled through the econotariat yesterday with the release by the Reserve Bank of credit aggregates for August.
Credit growth continued to accelerate and loans to investors grew to a six-year high of 9.2 per cent. Property investment now accounts for a record 21 per cent of total credit.
Is this bad? Well, the Reserve Bank cut interest rates to a record low to encourage people to borrow, in order to help boost the economy and employment. So it’s working.
Monetary policy, the last macro-economic manipulation, operates via credit, by definition.
The RBA would prefer companies do the borrowing, leading directly to employment, but while business loan approvals have increased, that hasn’t yet turned into actual lending.
In fact, in the past 20 years the shares of total lending by businesses and for housing have basically flipped -- housing has gone from 25 to 61 per cent of total credit and business credit has fallen from 64 to 34 per cent.
As discussed here recently (Houses could be overvalued for a very long time, September 17, and Housing: the curse that keeps on cursing, September 22) the obsession with home ownership in Australia is doubled edged.
In the absence of actual business borrowing, monetary policy has to work via housing. The RBA has cut interest rates presumably because it wants house prices to rise to get a ‘wealth effect’ on consumption, and that’s now working.
The trouble is that investors are hopping in as well, leaving the market ‘unbalanced’ according to the recent RBA Financial Stability Report.
But so far the RBA is not doing anything about it, perhaps hoping that worrying aloud will do the trick.
There’s talk of macroprudential policies to limit investment lending, but no one is rushing into this, and for good reason: there isn’t really a problem.
There were three booms in property investment during the 1990s, when investor housing credit grew at between 25 and 30 per cent per annum. The current growth rate is anaemic by comparison.
But house prices are obviously quite high, at least in Sydney and parts of Melbourne. Some think it’s a bubble, but it seems to me calling this a bubble defines that term out of existence: what was Japanese property in 1980s, or tech stocks in the 90s, if this is a bubble? Let’s just say prices are a bit elevated in parts.
Improved consumption is one ‘good’ effect of high house prices, apparently desired by the RBA (up to a point). Another one is that retirees can get more cash by downsizing, which is important because the superannuation system is inadequate.
Obviously the negative side of high prices is that houses become unaffordable for first home-buyers and it leads to a higher cost economy.
Germany deals with this by intervening directly in the property market to keep prices down, as part of its trade and industry policy. It’s one of the ways Germany keeps wage costs down to ensure its economy remains competitive.
Home ownership is heavily taxed to encourage renting, with the result that 40 per cent of German homes are rented, and local and state governments are subsidised by the federal government to release enough land to ensure housing keeps up with population growth. Occasionally German governments actually intervene directly and force house prices down.
As an aside, the US government intervenes in the energy market by reserving gas for domestic users, to make sure energy costs are kept down.
The US and Germany are the world’s most successful economies, now and historically. Is that because they intervene in the markets to keep energy and labour costs down via low house prices and a gas reservation policy? Or is it a coincidence?
Anyway, Australia is an open, free-market economy in which the only significant economic intervention is monetary policy, which tends to push up house prices and housing debt, and therefore labour costs.
That’s not going to change in a hurry. There is a political and business consensus around non-intervention in the market, apart from weak, tentative banking regulation, so the most that will happen is some extra control on bank lending.
As for whether the market will do its own thing and bring prices crashing down at some point -- maybe, but only if prices rise a lot more from here. But in fact there are already signs that prices have peaked and are rolling over.
There has been a huge increase in the supply of apartments in Melbourne and Sydney, so there will probably be a price correction in that sector.
But as far as houses go, Australia’s commitment to free markets and negative gearing could keep supply down, demand up and houses unaffordable for quite a while.
But as Germany has shown, there’s nothing wrong with renting.