Reading in The Australian the pleas of billionaire Harry Triguboff that the Reserve Bank not raise interest rates, one could be forgiven for thinking the man is a complete fool. But that would be a naïve assumption. You generally don’t become the third richest man in the country without a degree of nous. And you can bet that Triguboff was very much talking up his own book when he claimed that “rates must not be raised now if we want to keep unemployment down and our economy strong”.
Triguboff’s Sydney-based Meriton Apartments group is one of Australia’s largest home builders. According to BRW, Triguboff is worth at least $3.6 billion (and probably more now that property prices have continued to rise since this year’s rich list was calculated). The longer Australia’s housing bubble continues, the more Triguboff can sell his apartments for. If interest rates rise, the amount people will be able to pay for property invariably falls, resulting in prices resembling reality. That won’t be good for Triguboff.
On that topic, even the Financial Times’ influential Lex column unusually weighed into Australia’s property price debate this morning. Lex is effectively the FT ’s equivalent of the Australian Financial Review’s Chanticleer column — for it to comment on Australia’s property sector is highly unusual. But perhaps even Lex noticed what many Australian columnists, even our own Bernard Keane appear happy to ignore — that housing prices, regardless of so-called “supply constraints”, are not sustainable. Lex noted:
The underpin of a growing population, often trotted out by brokers and underwriters as a reason why house prices will do likewise, is unlikely to help much. As Morgan Stanley points out, there has been an almost perfect inverse relationship between real house prices and population growth for the past two decades.
Meanwhile, median value first homes are changing hands at 4.5 times average household disposable income, according to Commonwealth Bank of Australia — well above the long-run 3-to-1 mean.
The so-called “supply issue” touted by property boosters is based on a couple of fallacious assumptions — first, that immigrants will continue to move to Australia, regardless of the employment market and cost of living. Second, that Australians love housing more than the rest of the world, which supports our willingness to pay a greater proportion of income on housing and leads to Australians demanding bigger houses and living in smaller households.
Structural supply issues can take a long time to correct. There are fewer more percipient clichés in finance that the fact that “the market can remain inefficient longer than you can remain solvent”. Will immigrants continue to move to Australia as a house costs twice as much here as in the US? Will the Government continue to promote immigration if Australian unemployment rises above 10%? Unlikely. Of course, these structural changes often take years to eventuate, so the paradigm shift in property prices may take longer than even most bears suggest.
As for Triguboff, he is clearly a better businessman than he is economist. His claim that “it really amazes me that after seven years of stagnation in Australian housing prices, one or two quarters of very modest price rises are enough to make the RBA cry bubble” is comical. Perhaps Triguboff hasn’t looked too closely at actual statistics. ABS and REIV data indicates that the median price for a Melbourne property has increased from $241,000 in 2002 to more than $520,000 now — a rise of 115% in seven years. Hardly modest.
Triguboff continued to make a self-serving platitudes at one point noting that “my fear is that should the RBA raise rates, as production of new dwellings drops and rents rise, more and more people will leave Sydney, and eventually even Australia”. Given that much of Australia’s current housing problem is caused by over-leverage due to householders utilising too much debt, combined with more people moving to Australia than there are dwellings being constructed, that fear is somewhat unfounded.
Australia’s third richest man then opined that “Australians have always made money on their properties, and if we want to fight inflation then that is still the best way for them to prosper.” So according to Triguboff, continuing to ensure that property prices are out of reach for many young families is a good thing because it allows billionaire property developers to continue to make money. (The people who benefit from rising prices are speculators, bankers and the taxman).
Moreover, inflation is caused by an expansion in a country’s money supply, and is therefore curbed by increasing interest rates, as opposed to Triguboff’s suggestion that increased debt and higher property prices are a way of fighting inflation.
Triguboff is dead wrong. Higher rates will also work to pop the ever-growing housing bubble and ensure that in time, property prices return to more affordable multiples of average income. It will also reward those who save rather than those who consume, which will eventually benefit Australia’s productive capacity.
When monetary policy advice given by billionaire property developers is treated with anything more than utmost disdain, you know we are in one hell of a bubble.