Strong piece from Chris Joye in the AFR today.
There’s only one party to blame for Australia’s unprecedented house price bubble. And it’s not buyers, vendors, developers, immigrants or local councils restricting new approvals. While they have all contributed to the underlying demand and supply dynamics, the unsustainable price growth across Sydney and Melbourne since January 2013 is squarely the responsibility of the monetary policy mandarins residing in the Reserve Bank of Australia’s Martin Place headquarters.
It is these folks who dismissed our repeated warnings that they were blowing the mother of all bubbles and instead decided that the cheapest mortgage rates in history—enabled by cutting the cash rate a full 100 basis points below its global financial crisis nadir – is the elixir required to maintain “trend” growth. Never mind that this might actually be bad, productivity-destroying growth based on distorted savings and investment decisions that will have to be reversed when the price of money normalises.
And let there be no doubt this bubble is without peer. The dollar value of our homes, mortgage debt and house prices measured relative to incomes, and the share of speculative investors purchasing properties, have never been higher. So as far as valuations and interest rates are concerned, we might as well be exploring the surface of the Sun.
Slashing the cash rate to 2 per cent in May – or about 50 basis points below Australia’s core inflation rate – in the name of centrally planning economic activity is having other deleterious consequences. Setting aside the adverse effects of the absurdly cheap 3.49 per cent fixed and 3.98 per cent variable loan rates now offered, we have banks like Macquarie claiming that the 1.9 per cent interest paid on its market-leading at-call deposit product is “healthy”. Every day I meet retail and institutional savers struggling to figure out how to earn a decent return without assuming unacceptable risks that could decimate their wealth. With the Australian sharemarket down more than 8 per cent from its April highs and major bank stocks off more than 16 per cent, chasing dividend yields is patently not the answer for the defensive part of your portfolio.
