Wishing won't make a housing boom

Glenn Stevens' latest speech indicates Australians are unlikely to see a return to the 'unusual' house price boom of the last decade, no matter how much they want it.

Despite Australian’s love affair for residential property, Australia’s housing market might just be losing friends at a faster pace than Facebook.

The latest loss is the Reserve Bank of Australia, after governor Glenn Stevens said on Friday it should not "engineer a return to a housing price boom.”

Speaking in Adelaide to the American Chamber of Commerce Internode Business Lunch, Stevens said he believed the household sector could be the reason behind such low levels of confidence, especially after Wednesday’s ABS posting of a "quite respectable” 1.3 per cent rise in GDP for the March quarter.

He described the decade or more leading up to 2007 as quite "unusual”. It was a decade when real asset prices (mostly residential housing) per person appreciated at 6 per cent or more per annum and household debt started to really pile up. The increase in perceived wealth caused household consumption to grow faster than incomes for a lengthy period and household savings to fall through the floor.

Stevens said Australia was not the only country to experience these trends, but avoided linking high household debt levels and years of irrational exuberance to the root cause of the GFC. He did note, however, that the GFC has reverted households back to more prudent and sustainable behaviour. Household net savings is now hovering around 10 per cent of household disposable income and households' appetite towards leveraging for the purposes of asset speculation is waning.

Consumption is down and it is no surprise retailers are hurting, with Stevens saying: "The gap between the current level of consumption and where it would have been had the previous trend continued is quite significant.”

However, ignoring the unusual and unsustainable boom period of last decade, current real consumption growth "is in fact, quite comparable with the kind of growth seen in the couple of decades leading up to 1995. It is in line with the quite respectable growth in income.”

For this reason, Stevens believes Australians should be happier than they currently are. But with fond memories of the boom times, Australians don’t see it that way. They want a return to these times, no matter how unsustainable they were, and there lies the problem.

"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.”

House prices

Another area of dissatisfaction could be falling house prices. Real estate agents have sold the expectation that house prices double every seven to 10 years but as Stevens points out, this is quite "unusual”.

Cuts to official interest rates in November and December last year, and a big 50 basis point cut in May has done nothing to help stabilise a declining market.

The RP Data-Riskmark Home Value index shows house price falls are picking up the pace, declining a further 1.4 per cent in May despite the 50 basis point cut. Melbourne led the falls with a 2.66 per cent drop for the month.

Last week, data from SQM Research showed stock for sale on the market increased 2.4 per cent in May to 380,215 dwellings. In Melbourne, stock increased 7.6 per cent in the month.

Meanwhile, the Reserve Bank's 25 basis points rates cut, which took the cash target rate to 3.5 per cent, disappointed many who had expected a 50 basis points cut.

In addressing the implications for monetary policy, Stevens said the RBA should not "engineer a return to a housing price boom” or "foster a renewed gearing up by households.”

Instead, we need 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.”

Stevens also points out there is too much focus on the minority of the population – the just over a third of people who own a mortgaged dwelling. The RBA cannot neglect those who live off their savings, adding "returns available to savers in deposits (with a little shopping around) remain well ahead of inflation, and have very low risk.”

Steven’s speech could mean any future expectation of rate cuts is unlikely, barring any sharp external shocks to our economy. And when they do cut, they will make sure it won’t fuel our housing bubble.

"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.”

Craig Peacock runs a blog called "Who cra$hed the economy?". You can read his posts here.