One aspect of Governor Glenn Stevens's latest speech that I overlooked in my earlier review was a response to a question from NAB on house prices.
The backstory here is that NAB have consistently got their house price forecasts horribly wrong. They were predicting a 10% fall in 2009 (we look like we will be up by more than 10% this year--so they were off by a doubtless disappointing 20% plus).
In any event, Glenn came to the party again and put paid to suggestions that there is currently a bubble in his typically taciturn central bank speak (note to those economic commentators, such as Jessica Irvine, who appear to be willing one).
Here it is important to appreciate that the Governor was given many openings by his inquisitors--who have ordinarily been folks predicting house price falls--to engage in some 'open mouth operations' on prices (refer also to his response to David Uren's question in my earlier post).
He could easily have said that he thinks the market looks a 'tad frothy', or 'does not seem to be rationalised by fundamentals', or is 'giving the bank some pause for thought'...But he evidently chose not to. Stevens and the RBA's internal housing maven, Anthony Richards, have already made their primary point: they want to see the supply-side elastified, which will require local, state and federal government coordination to remove a range of impediments to the production of low-cost housing. They also think that lenders have been excessively risk-averse in providing finance to developers.
On this latter point, I do wonder whether the banks are just acting rationally. Development assets carry materially greater hazards than the 'established' or existing housing stock because new supply tends to come online in areas with, frustratingly, low demand (eg, on the fringes of cities). This is largely due to the fact that it is very difficult to produce new supply in existing urban areas. That is to say, it is far easier to deliver new housing in regions with easily accessible ‘greenfield’ sites and more accommodating zoning ordinances.
Development assets are also frequently located long distances from major labour markets, such as a city’s CBD, and can be poorly serviced by critical government infrastructure (ie, trains, buses, schools and hospitals). In short, the ‘amenity value’ of the new supply is often far lower than the existing stock.
Other complications with development assets include significant concentration risks, wherein large numbers of properties are situated in small and isolated geographic locales (with commensurately uncertain demand prospects). Development holdings do not, as a consequence, provide a useful proxy for the broader $4 trillion residential property asset-class, which would require a portfolio of assets weighted on a market-capitalisation basis throughout metropolitan Australia.
Anyways, this is what the Governor specifically had to say on the question of bubble trouble:
"Well, a number of my colleagues - Ric, Tony Richards who's sitting here - have given talks about house prices and have done far better than I will standing here thinking off the top of my head. But, you know, is it a bubble? I'm not sure that's obvious, what's happening. I think there are some fundamental demand and supply issues, so it doesn't - one should not immediately reach the conclusion that that's a bubble. There's a threshold test you have to past before you reach that conclusion [unsurprisingly, he did not reveal the content of said test]...I think the buoyancy in the property market for housing generally is one of the things that's helping support confidence, and that's part of the dynamic we are seeing. So that's all factored in, which isn't the same thing as saying that house prices per se is the thing we're going after. That's not the case at this point in time."
