CONCRETE DETAIL
by Christopher Joye
Posted 22 Jul 2009 8:52 AM
RBA vs Steve Keen
Oh dear. Life must be really tough for all those brave commentators willing massive house price falls. (I guess they got the media air time they wanted.) Based on the RP Data-Rismark numbers, Steve Keen will be hiking to Mount Kosciuszko in June this year (in fact, he should be pulling on the winter weather gear in approximately one week’s time, if he was to treat his bet with Rory Robertson literally – I know Steve will, however, argue that he wants to see the index sit above its February 2008 peak for a number of months before embarking on his long journey).
Interestingly, this is what I anticipated in December last year – so much so that I formally wrote to Dr Keen to warn him that “if I were a betting man, I would venture that you will be on your way to Mount Kosciuszko before the end of Q3 next year. I used to spend a lot of time up at Thredbo and it gets very chilly mid year – I have only ever done the Kosciuszko summit hike in summer.”
On a calendar year basis, Australian house prices fell by a tiny 2.6 per cent in 2008. In 2009, they have risen by 4 per cent in just the first five months of the year. And they look like they will continue to edge out modest gains going forward.
I welcome the day when I hear Gerard Minack, who predicted 20-30 per cent nominal house price falls, and Steve, who was confident of 40 per cent price declines, coming out publicly and declaring that they got Australian housing wrong – way wrong. Somehow I don’t think that that day will come to pass. People tend to find it hard to admit they were wrong – there will always be some excuse. Oh the first time buyers’ grant. Ahhh, but prices are increasing everywhere, not just in the cheap suburbs (see below). And shouldn’t your forecasts have anticipated at least some countercyclical policies? Furthermore, there are first time buyer subsidies being used in other countries where prices are declining...
The truth is they were always going to be well wide of the mark. Any objective assessment of their analysis led one to that very clear conclusion (recall my previous note on how Morgan Stanley’s own research conflicted strikingly with Mr Minack’s surprising forecasts). The problem is that neither Steve nor Gerard presented any seriously credible analysis of what precisely would lead to gargantuan house price falls other than Steve’s best-case scenario of a 15 per cent unemployment rate. Yes, that’s right – Steve has told me that he thinks that a more likely outcome for Australia is 30 per cent, and that we would be “lucky to get away with” 15 per cent unemployment. For those that don’t know, unemployment is currently sitting at 5.9 per cent and the rate of increase appears to be declining, not rising. Unfortunately, the media is not in a position to discriminate and they tend to treat any claims – irrespective of how irresponsible – by persons with “economist” in front of their names as reliable.
Arguably one of the most interesting statements in the RBA Board Minutes yesterday was their observation that Australian house prices are rising “in almost all areas” as opposed to just the cheap ones. This eviscerates the argument that the house price recovery has been limited to low-end properties being acquired by first time buyers:
“Members also noted that, according to a range of private-sector measures monitored by the staff, house prices had increased in almost all areas over recent months. Auction clearance rates in Sydney and Melbourne were also high, though the number of sales by auction was not particularly high. Housing loan approvals were strong, and while existing borrowers had increased their loan repayments, overall housing credit had recorded solid growth.”
Our data confirms the RBA’s statements. In the chart below, we show the performance of the top 20 per cent of suburbs across Australia ranked by price (ie, the most expensive areas), the middle 60 per cent of suburbs (the mass market), and the bottom 20 per cent (ie, the cheapest regions).
Source: RP Data-Rismark
We will doubtless confront the inevitable media confusion when the ABS releases its quarterly index in the first week of August, which excludes terraces, semis and apartments that account for up to a third of all home sales, and relies on a stratified median price method that can be impacted by “compositional biases” (eg, more lower valued homes trading because of higher first time buyer activity).
With this in mind, Macquarie Bank’s Rory Robertson had some advice for the national statistics agency: “Private-sector providers like RP Data-Rismark…now publish world-class price indexes, after mining great detail from a large subset of recent home sales… Indeed, now that the private sector has made providing reliable monthly home-price indexes a major focus, there seems little point in the ABS continuing to produce its quarterly House Price Indexes (HPI)”.
One final word on the RBA. I have been a pretty tough judge of them in the past. But let me say that I think they’ve done a terrific job post August 2007.
I also like the fact that the Bank seems collectively more open-minded. I actually believe that the GFC has been very good for the RBA in destroying any potential hubris after the so-called “great moderation” when central bankers were treated like deities. Poor old Alan Greenspan.
I’ve said this before, and I will put it on the record again: taxpayers are lucky to benefit from the quality of human capital that resides within the walls of the RBA. Sure, life as a central banker tends to appeal to certain personality types. And I do remain concerned about the RBA’s weak governance structures. But the fact is that many of the folks working within the RBA are absolutely world-class. Indeed, I cannot imagine any other part of the public service, perhaps with the exception of ASIS and ASIO, having the ability to attract such high-quality candidates. Amongst economists, there is a great deal of reputational cache having a stint at the RBA on your resume. Many young honours students view it as the employer of choice.
And so it should be – the best economics faculty in Australia is not to be found at any local university: it is located at the RBA.
I do sometimes get concerned that people spend too much time thinking about “base-cases”. One of the RBA’s central mandates is system stability. This requires them to shift their cross-hairs away from the high probability outcomes that dominate the monetary policy setting process and spend time contemplating the risks associated with much less likely doom-and-gloom contingencies (it is in these situations that one needs to take a hard look at what the likes of Steve Keen are saying to try and figure out whether there is any valuable information embedded within their beliefs).
Whether you are a bull or a bear, I think everyone would agree that the nascent recovery or stabilisation that Australia is currently experiencing is fragile at best. There are many risks that remain outstanding. Critically, the RBA has hitched itself to the view that the current level of lending rates is optimal for these and future conditions. Here I think they should work to maintain control over lending rates following the deterioration in the relationship between the latter and the RBA’s cash rate since the advent of the GFC.
From both an economic management and credibility perspective, it is important that the RBA does not allow mortgage and business lending rates to rise materially beyond current levels.
With this in mind, I would have thought that there remains a case for a pre-emptive strike against the banks’ margins by cutting the cash rate by, say, another 25bps to minimise the ineluctable political furore and pressure on the big banks (which, to be frank, is not ideal) when they are forced to chisel out higher rates as their weighted-average funding costs increase.
A 25bp cut is also unlikely to reduce actual lending rates any further – it will go straight into the banks’ margins (there should, therefore, be few concerns about injecting excessive stimulus).
But it would be a very prudent insurance policy in the current climate.
For what it is worth.
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