May 16, 2012

RBA has no idea just how the housing market works

It appears the RBA’s thinking is that house prices are falling because people expect house prices to fall and because people are fearful of losing their jobs.

Adam Schwab — Business director and commentator

Adam Schwab

Business director and commentator

A week after delivering a slap to responsible savers through its 50 basis points interest rate cut (and handing a free kick to banks and speculators), the RBA’s minutes, released yesterday, provided one of the more bizarre attempted justifications for weakness in the property market.

The RBA provided that its decision to lower rates by 50 basis points was partially based on “information from liaison suggested that households were unwilling to commit to contracts for new dwellings because of concerns about job security and declining dwelling prices”. The RBA added that “despite dwelling prices declining relative to incomes and rises in rental yields, forward-looking indicators implied little prospect of an imminent recovery in housing construction”.

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5 thoughts on “RBA has no idea just how the housing market works

  1. John Tevelein

    The issues Adam raises can be solved by one action, remove negative gearing on investment property. Outcomes: 1. House values fall and rents rise to realistic levels. 2. Home ownership for personal use becomes attractive stimulating realistic borrowing. 3.Interest rates rise. Simple really.

  2. Hamis Hill

    Hopefully this article is the beginning of many more incisive analyses to follow. But fundamentally the housing market in Australai is corrupt. It is a speculative market. In my 1986 article “Housing and the Economy” Tertangala, I pointed out the posy WW2 housing markets imposed on Japan and Germany by conquerors who needed to counter poverty and the threat of communism. No money went ot housing, all investment went to industry . people lived in shanties but had employment and relative political contentment.Pre-war and pre-mineral South Australia whishing to foster an economy in a desrt state as a matter of policy developed low cost housing to lower wage demands and encourage the establishment of manufacturing. A corrupt, competition-free cartel of housing and banking industry interests have imposed a “what the market will bear ” price on housing controlling the market and using bank- induced capital gain to delude borrowers that their interest payments are being covered. The primary purpose is the highest levels of debt on tthe highest levels of interest for the highest, corupt levels of profit, while the economy itself is ruined. Acorrupt market ehich ignores the rules about wealth creation as laid down by Adam Smith who pointed out that housing is not a wealth creating asset and cannot produce the profits which sustain the einterest on borrowed capital. The solution is competition but entrenched private interests control the housing market at the local government level maintaining the destructive status quo and resisting with their monopoly profits all efforts to ratioalise their “industry. Perhaps the article “Politics, Housing and The Economy” is long overdue but look to the corrupt, housing/banking cartel as the corruption of the free market competition which will solve the problem.There is no competion in the housing market and it is nonsensical to discuss the market as if there were an operating free market. One of the enduring delusions which has led to this point. Greed pride ego all coming before this fall.

  3. drsmithy

    House values fall and rents rise to realistic levels.

    Rents are already at realistic levels. If anything, they’re a bit high.

    (This is of course ignoring the handful of places suffering from the mining boom where rents are outrageously high.)

  4. CaptainLee

    So tell me, if the cost of constructing a apartment or house
    as raw materials, labour and margins of builders are pretty set,
    and not likely to drop 10%,20%, or even 40%. Cost of civil engineering
    , infrastructure and government charges also.

    Holding costs are still pretty high

    So its the raw land cost that only could go down… and are landowners,
    or perhaps land bank investors willing to drop even more.

    So supply and demand, affordability are all good, but no one is
    going to sell property below cost.

    This as it relates to new housing, but existing housing is valued
    somewhat on what it takes to buy new compared to used.

    Development will just not happen , will it?

    Are you not all focussing on one side of the equation?

    Could be wrong, be interested in anyones comments.

  5. drsmithy

    Real building costs have not increased appreciably. Nearly all the price increases are in a) land valuation (due to artificial supply constraints), b) Government charges and overheads and c) developer profiteering.

    State Governments have become utterly dependent on stamp duty revenue for funding. Hence they have next to no interest in pursuing affordable housing (ie: land).

    Holding costs for land are not high (which is part of the problem – they should be VERY high). “Land banking” by big developers on urban fringes has been a significant contributor to the housing bubble.

    There are two significant cohorts of property owners who will under severe pressure to sell property over the next few years: Cash-poor Baby Boomers who need to finance their retirements and negatively-geared property “investors” who can no longer afford to subsidise their tenants in a stagnant (at best) real estate market, slowing economy and rising unemployment.

    The situation is all covered in great depth and detail by the Unconventional Economist at Housing prices will have to come down by about half in real terms to return to affordable levels. The only real question is whether it will happen with a US-style crash or a Japanese-style stagnation.

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