Ok children? Are we all sitting comfortably? Then let’s begin.
Who noticed yesterday’s Westpac/Melbourne Institute consumer sentiment
survey that says an increasing number of people think now is a good
time to buy property – despite what the Reserve Bank says – and the
Australian Bureau of Statistics report showing banks and other lenders
have been increasing their property-related loans for three months?

Homebuyers and property investors arranged loans of $13.2billion in
April, the Oz reports this morning. “Although down from the peak
of $15.5billion last October, April’s loans were up 4.6per cent from
February’s low point,” it says. “The average size of loans for
owner-occupiers hit a record $201,800.

“There were 35,336 new home loans approved for people either buying an
established home or building a new one for their own use. The ABS does
not record the number of investor loans but, based on the average size
of investor commitments, there would have been at least 18,000 new such
loans arranged in April.”

Last week, RBA boss Ian Macfarlane quoted real estate agents as saying
“new investors have vanished from the market” – and said that he was
surprised approvals had not fallen further.

The consumer sentiment survey, however, showed a 29per cent increase in
the number of people who think now is a good time to buy a dwelling,
following a 17 per cent rise in the previous three months.

“The Reserve Bank is likely to raise rates further unless overall credit growth starts to reduce,” the Oz said.

“Financial advisers canvassed yesterday were inclined to agree with Mr
Macfarlane that now was not a good time to be entering the property
market as an investor. ‘There has always been a public perception
by people who aren’t that investment-savvy that bricks and mortar are a
safe place to invest,’ said Damian Cullen, principal of Cullen
Financial Planning…

“Stacey Martin, financial planner with National Private, noted rental
returns were typically 2 to 3per cent, while interest rates were 6 to 7
per cent. She said people entering the market now would need a
very long-term view to expect any advantage.”

Figures out last week indicated it is getting harder for mortgage
holders to meet their repayments. The AMP banking and the Real
Estate Institute report showed home loan affordability was at its
lowest level in almost 13 years.

And then there’s the Budget – and the four billion dollars plus its currently dumping into the economy.

Economic 101 says that if you keep chucking money at the punters, the
economy overheats. When the economy overheats, inflation
rises. When inflation rises, central bankers – independent
central bankers nowadays, remember – pull on the interest rate levers
and crank them up.

The money was flowing through even before the Budget – capital gains
tax cuts, the doubling of the home owners grant, the fiscally loose
2001 Budget…

Pity poor Mr Macfarlane. The RBA Governor must have one of the
toughest jobs in the country. He ruled out an interest rate hike
before the election not that long ago – but in the wake of the Budget
and oil price volatility, he must be having second thoughts.

But when will he throw the switch? If he starts making noises
about rates soon, the Government’s strongest card – economic management
– will look like a busted flush.

Get it over with, PM. Get it over with.

Hillary Bray can be contacted at hillarybray @crikey.com.au