6 July 2020
1300 794 893

Don't mention the bubble word! I did but I think I got away with it

Peter Switzer
22 March 2017

By Peter Switzer

If you’re buying properties in Sydney or Melbourne, you really need to do your homework because the bubble word is starting to be used and it’s starting to even worry me a little. I’m not alone, with the Reserve Bank of Australia and the Australian Prudential Regulatory Authority (APRA) getting a tad nervous, though they still haven’t uttered the bubble word.

Why won’t they?

Well, because on present criteria, many of the buyers/borrowers can service their loans and have sufficient collateral to justify a bank trusting them with their money. The risk would be that things might change.

As I reflect, Donald Trump and China (now there’s two strange bedfellows) could prick this ballooning house price story in Sydney and Melbourne!

Ironically, it’s those two characters who make me sleep easy at night and not be too worried about the madness happening at auctions every Saturday in Sydney and Melbourne. Donald Trump has added positivity to the US and global economic outlooks, which delays the eventual recession that one day will show up in Australia. A recession, which brings rising unemployment, would bring a lot of borrowers undone. And the resultant oversupply of properties on the market would bring price crashes to many suburbs where buyers have taken a huge punt.

China is also a big help to global growth. Yesterday, its decision to scrap its import restrictions on the products of companies such as Blackmores, A2 Milk and Bellamys showed what it can do to share prices and corporate confidence.

Even the IMF has upgraded world growth, which is good for a country such as Australia, which thrives off a greater global economic setting.

Of course, the Reserve Bank, which didn’t use the B-word in its minutes released yesterday, says there is a “build up of risks” (that’s the wording of the Big Bank), while “bubble” is oh-so-media or can be used by an economist looking for attention.

Yesterday’s minutes told us that:

  • The RBA is optimistic on the Oz economy, medium term.
  • The housing sector and its price increases in Sydney and Melbourne is a concern.
  • The pending oversupply of apartments — basically in Brisbane and Melbourne — is an upcoming issue.
  • The rise of investors borrowing is a concern.
  • And so is a slow growth in rents.

In the old days, the RBA would simply raise interest rates. In the past, concerned central bank bosses have opted for two quick rate rises in a row. Maybe one would be 0.5% and not an expected 0.25%. However, our economy isn’t strong enough for that right now.

With wages growth slow but with hopes that things will improve slightly this year, and business investment still not in gangbusters land, the RBA can’t simply raise interest rates.

Also, such rate moves would push up the Oz dollar over 80 US cents and hurt economic growth.

The RBA is caught between a rock and a hard place. They really wish homebuyers and investors would stop buying properties or potential sellers at least started putting their homes on the market to increase supply to depress price rises.

In a perfect world, our economic saviours, Trump and China, help us grow stronger, which makes it easier for the RBA to raise rates, which might then spook the bolshy buyers out there who have become addicted to property.

Of course, the irony is that if the Trump/China story works over the next two years, interest rate rises could surprise a few thousand borrowers out there and the mechanics of a property price turnaround will be put in place.

I’m certain Mr Trump will help create an economic boom and then a recession and that’s when a bit of good sense will return to property prices. But that’s a story for another day.

In case you’re a bubble worrier, the head of APRA, Wayne Byers, spoke yesterday at the Australian Securities and Investments Commission (ASIC) annual forum and refused to utter the “bubble” word, instead opting for the “B-word” reference.

This was his take: "I don't use the B-word. I refuse to use the B-word. It implies a binary, that's too simplistic," Mr Byres said.

"We are in an environment of heightened risk. House prices are high and particularly in this one (Sydney) they're rapidly rising." (SMH)

Given the problem the RBA has with raising rates now to take air out of the balloon (not the bubble), in his May 9 Budget, Treasurer Scott Morrison is tipped to come up with a property price play policy. Watch this space.

Click here to subscribe to the Switzer TV channel on YouTube and keep up to date with all of our shows.

Get the latest financial, business, and political expert commentary delivered to your inbox.

When you sign up, we will never give away or sell or barter or trade your email address.

And you can unsubscribe at any time!
1300 794 893
© 2006-2020 Switzer. All Rights Reserved. Australian Financial Services Licence Number 286531. 
homephoneenvelopedollargraduation-cap linkedin facebook pinterest youtube rss twitter instagram facebook-blank rss-blank linkedin-blank pinterest youtube twitter instagram