Saturday, May 6, 2017

Housing: Part 226 - Australia looks to break its winning streak

Reader Benjamin Cole alerted me to the recent rate decision at the Reserve Bank of Australia.  It seems that for the last couple of years, the RBA has been moving along at a somewhat tight stance, with low inflation, unemployment that has slowly edged up, and home prices that keep rising.

Here is an article from last month about Australian monetary policy that is basically a litany of the errors I think the US made in 2006 and 2007.  It has all the basics - a bias toward raising rates because of high home prices, expectations of a home price collapse, and a preordained narrative that blames those expected price declines for the expected recession.
“It seems the RBA is stuck between a rock and hard place,” said CoreLogic head of research Tim Lawless. “They aren’t likely to push rates higher just to quell housing market exuberance — doing so could push inflation lower and the Australian dollar higher as well as cancel out some of the much-needed stimulus that many sectors of the economy are benefiting from. “On the other hand, the RBA would be loath to push rates lower out of concern for adding further fuel to an already over heated housing market.”
While 70 per cent of experts polled by disagreed that Sydney and Melbourne are in a “bubble”, economist Saul Eslake has issued a warning. “A house price fall north of 10 per cent is the most likely cause of the next recession,” he told The Australian.

There are some differences between Australia & pre-recession US.  According to the article, mortgage rates are rising while the central bank holds the policy rate steady.  In 2006, mortgage rates in the US were staying low as the Fed raised rates, which I attribute to building recessionary conditions.  Also, housing starts in the main Australian cities do appear to be increasing somewhat.  It could be that they need to increase much more than they are.  The US Closed Access cities would probably need to double building rates to reverse their migration patterns.  If the Australian cities are in similar circumstances, it could be that a 20% or 30% increase in building isn't enough to trigger a regime shift.

According to this article, rent in Sydney is rising, although not as sharply as it had previously.  And prices continue to climb.  That suggests that new supply is allowing costs to moderate somewhat, but not enough to reverse expectations of continued inflation.  Of course, this leads to pushback from opposition parties that say it proves that new supply won't bring down costs.  It would be nice to see a city try to really do a regime shift on supply.  But, that would be difficult, politically.

It seems like Australia is in the sort of position the US was in before the recession, though.  There is an asymmetry to their policy.  They have a bias toward a tight policy because they are afraid of home prices, so, in the uncertain world of monetary policy, it seems like they are destined to follow a somewhat stochastic path until that path happens to become tight enough to be destabilizing.  There is little chance, on the other hand, that they will happen to become too loose.  It seems to me that this makes a recession somewhat inevitable, but not particularly predictable.  In the US, housing starts collapsed before the recession, and this isn't happening in Australia.  Maybe that difference is enough to keep Australia on the right side of the tipping point.  In the US, collapsing housing starts were, maddeningly seen as a positive.  My limited view suggests that doesn't seem to be so much the case in Australia, although worries about mortgage debt can easily turn into "solutions" that lead to less building.


  1. Great post, but I think some topics are not addressed enough.

    1. Obviously, property zoning. This problem appears to frequently afflict Anglo cultures, from Vancouver, to London, to Sydney to Los Angeles.

    In Tokyo, zoning is not so obstructive, and they build lots of housing, so the cost of housing has been going down for decades (Tokyo's population is growing, it is where young people want to live).

    Somehow in Anglo cultures, the idea of property rights was invested with the right to keep one's neighborhood as one saw fit. Then, financiers gained a stake in the zoning system, as they extend loans on zoned property, which would go down in value if unzoned. So there is a powerful combination of propertied and financial interests aligned with property zoning.

    I assume in Tokyo financiers are less willing to lend on property, which in itself tames property values.

    2. Vancouver has placed a 15% tax on foreign property purchases, and many Aussie banks will not give loans to foreigners to buy houses. Obviously, foreign capital inflows play a role in property values.

    The Fed says so too.

    Thus, Anglosphere central bankers face a complicated situation. Their nations run high trade deficits, which help balloon property values in concert with property zoning.

    To cool off housing means a central bank must suffocate the economy somewhat. The situation is further confused as property lending is what banks do, at least 50% of bank portfolios are property.

    The real solution is to somehow reduce property zoning, and barring that, reduce trade deficits.

    The latter course is immediately seized upon as the path and suggestion of xenophobic, mercantilist, neanderthal Luddites….and nothing scares an academic so much as being defined as "xenophobic," or worse, "mercantilist."

    As a practical matter, perhaps a hefty tariff on imports might actually work, and would allow the Fed to not suffocate the economy to battle high house prices. The exposure of banks to a property value plummet is also disturbing. See 2008.

    Macroeconomic policy must be made with the facts on the ground, not in theory.

    Or, we can blame high house prices on $98,000 construction workers and timber prices. But go mute on properly zoning. That is evidently what U.S. macroeconomists are doing.

  2. Copper, barometer of global economy, posts worst drop in 19 months on China growth worries
    Copper futures for July delivery settled 3.49 percent lower for the worst decline since September 2015.
    Manufacturing data in China came in weaker than expected this week.

  3. Kevin, got any posts planned on the Canadian housing market? As a renter in Edmonton I've been following the drama from the sidelines. Everyone and their dog is calling it a bubble, and limits on mortgage lending and foreign investment seem to be the policy prescriptions of choice. Also would love to know how various Canadian cities shake out your Open vs. Closed Access rubric.

    1. I don't understand it. Except for maybe the east coast, it seems like every city in Canada is expensive. Is that the case, or is a place like Edmonton less expensive than I think it is? Do you know what it is that prevents new supply?

    2. Beats me. All the takes I'm getting are from laypeople or news outlets charting it as a northern replay of the last housing crisis. If you or anyone on your blogroll finds time to dive into the Canadian data I'd love to get some clues.

    3. Here's an article with migration patterns. It looks like Vancouver and Toronto have migration patterns similar to the US Closed Access cities, with high international in-migration and domestic out-migration, although the out-migration isn't as strong as in the US cities.

      But, I'm curious about Edmonton. Does it seem like it is hard to build new homes there? Are rents high?

    4. Just checked and the average two bedroom rental here was $1113 (USD $818) in 2016, down YOY for the first time since 2009, with vacancy rates above the Canadian average. The oil crash might have something to do with that.

      The mayor has put an emphasis on infill development so I've been noticing more of it in recent years, but don't have a baseline off which to say how hard or easy it is to build. General contractors have no shortage of work but a lot of that could be luxury renovation that adds no density. The city just approved small alley-facing units in residential lots, which is cool. Edmonton property values still feel frothy but not in the same universe as what's happening in Vancouver or TO or their affected radii.

    5. Interesting. That seems pretty reasonable. But, why is Edmonton pushing infill development? What's the need for that?

    6. Veering into conjecture: Edmonton has a large land area for its population and keeps sprawling into the surrounding prairie. Doubt that changes. The lack of density isn't a disaster. But it isn't great for renters and transit users like me who are drawn to the city centre. Population is growing and there are lots of central neighbourhoods where the available housing stock doesn't nearly meet demand. One no-brainer example that's been years in the making: they're rezoning a small aircraft runway north of downtown for mixed use development. Conversely a lot of two car garage type homeowners flip their wigs at proposals for more row housing and condos and alley-facing units in their neighbourhoods because for them sprawl is a feature of Edmonton not a bug.

    7. Gottcha. I misunderstood what you were saying in the earlier comment. Thanks for clarifying.