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Is Dr Phil's diagnosis on Aussie house prices right?

7 February 2019

On Friday we get the Reserve Bank’s latest take on the economy but I was given a sneak preview yesterday over lunch with Dr Phil Lowe, the Governor of our central bank. Now I know from being slugged and trolled on Twitter, that there are a whole pile of experts out there who think they know more about house prices, interest rates, economic growth, wages and a whole lot more. However, this guy is paid around a $1 million a year because the people who run this country of ours think he’s close to being the smartest guy in the room on the subject of the Australian economy.

When I was given a shot at asking the good doctor a question, I said that I had largely gambled on him and the RBA when it came to house prices and wondered if I’d backed the ‘right horse’! And did he rate his house price forecasting model?

Like most responsible economists he dodged saying his house price forecasting model was infallible but insisted the price fall would be “manageable”, which is his way of saying “the doomsday merchants will be wrong.”

Now Dr Phil is a measured man, but for a central banker he’s quite witty and is prepared to try a joke or two, which worked pretty well with his speech and his Q&A session.

He believes the following:

• Despite the house price falls in Sydney and Melbourne, prices are 75% higher in Sydney than a decade ago and 70% higher in Melbourne.

• The reason why prices are falling is prices went too high, a building boom increased supply of properties, demand from China reduced because the Chinese Government wanted to stem capital outflow and local lending standards became too tight.

• He doesn’t think the next move in rates will be down because he believes our economy will see lower unemployment and higher wages over 2019 and 2020.

• The better labour market will help to offset negativity that consumers might have about lower house prices.

• More Australians will feel wealthier because of property price rises over the past decade than those who might be negative because they bought just before house prices started to fall.

• He’s more worried about global economic problems — trade wars, China’s growth, the Fed raising interest rates too fast — than he is about the OECD’s concerns about collapsing house prices.

• He doesn’t think tax concessions, such as negative gearing, explained why house prices boomed in Sydney and Melbourne, because prices didn’t boom in other capital cities and in the regions for five years, yet the same tax incentives were available in those property markets.

• He says 2019 will grow at 3% now rather than his former guess of 3.5%. And while he’s less bolshy that interest rates will go up and accepts that rates could move down, he’s still in the “next move is up” camp.

• And by the way, if Dr Phil is wrong on the improvement in the labour market with more jobs and higher wages, he would cut rates and firmly believes they would work. The cash in the pocket effect and the lower dollar would create jobs and growth.

• He says business investment plans are positive and post-election tax cuts will help the economy.

What I liked about Dr Phil was that he didn’t talk about the threat of recession. And while his house price forecasting model might not be seen by him as his 100% right showpiece, working out how our economy is travelling has to be his and the central bank’s long suit.

If my Twitter trolls are going to be right about a 30% to 40% house price collapse in Sydney and Melbourne, then they need a recession and rising, not falling, unemployment.

Our economy is slowing from above 3% growth but Dr Phil says the December quarter will be better than the September quarter. And with the Royal Commission recommendations out of the way and the stock market climbing again, then both consumer and confidence might start trending higher.

That said, both confidence readings still need to deal with Trump’s trade war anxiety and pre-election dread, which is never good for the economy.

Since I started writing and broadcasting on the economy over three decades ago, I’ve occasionally disagreed with the RBA. But as I’ve put my money on their current views via my exposure to stocks, property, employing four new staff members this year and investing in my business, I really hope I’ve backed the right ‘horse’ in Dr Phil!

In case you doubt the Governor on rising wages, these charts say he might be on the money:

Australia Annual Change in Hourly Rates of Pay

Unemployment 2014-Now 

I’m sticking with the million dollar man!

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