The author has been described by News Ltd as an "iconoclast", "Svengali", a pollie's "economist muse", and "pungently accurate". Fairfax says he is a "Renaissance man" and "one of Australia’s most respected analysts." Stephen Koukoulas concludes that he is "85% right", and "would make a great Opposition leader." Terry McCrann claims the author thinks "‘nuance’ is a trendy village in the south of France", but can be "scintillating" when he thinks "clearly". The ACTU reckons he’s "an enigma wrapped in a Bloomberg terminal, wrapped in some apparently well-honed abs."

Sunday, November 21, 2010

Treasury's concerns understandable

Dr Stephen Kirchner on Treasury and house prices is worth a read here. Stephen is always good value on housing. For mine, this is just a reasonable conversation amongst analysts inside Treasury. Of course there are risks in the housing market. There are risks in all asset markets, and housing is no different. For example, we at Rismark have for years been discussing our research on the empiricially quantified risk of a single family home, which was the first analysis of its kind published in Australia (read it here). In short, we have demonstrated that the volatility of an individual home is many times that of a nationally diversified index, and more akin to the riskiness of shares. This is a very rarely appreciated point, which was also canvassed in detail in my 2003 report to the prime minister on the demand- and supply-sides of the market. Naturally, the housing market nutters will never reference our research as it does not fit with their narrative that we are unconditional "bulls". The truth is that the Australian housing market is hardly "cheap" right now, and, as we have correctly predicted for well over a year, there is little prospect for capital growth in the next 6-12 months. The risk is that the RBA is forced to crush housing demand as collateral damage in its war against capacity constraint-induced inflation. We highlighted some time ago that every time the RBA has aggressively lifted rates since 1993 dwelling prices have fallen. The obvious difference this time around, which Treasury correctly observe, is that the interest rate sensitivity of household balance-sheets is higher than it has been in the past. Idiots will tell you that this means house prices are going to fall 20-40%. There is not a snowball's chance in hell that will happen. What people forget is policy endogeneity: the RBA is hardly going to trigger the collapse of our banking system in order to keep inflation within its 2-3% pa target band. Regrettably, this story is far too nuanced for the lunatic fringe.

One final point for those who would classify us as housing "bulls". As I have mentioned many times before here, we expected modest price falls in 2008, a robust recovery in 2009, and a soft-landing in 2010. Today we are forecasting further price tapering, particularly if the RBA lifts the cash rate to 5.5-6.0%. Now I am not sure how anyone could reasonably classify this as being extremely "bullish". I think our most aggressive statement on capital growth has been that through-the-cycle we expect house prices to track disposable incomes, all other things being equal. I would characterise our projections as being informed by the data and fundamentals at the time. What I find interesting is that the so-called "bears" never modify their views, presumably because they are generally fact-free: one well-known bear has been calling for precipitous house price falls since 2002. I guess if you stick to this rhetoric long enough the data will eventually swing your way, if only temporarily.