The decision on interest rates from this afternoon’s monthly meeting of the Reserve Bank board will only be of passing interest for many in the markets. No rate rise, and certainly no fall, is expected. Like everyone else, the RBA might be more interested in the US government shutdown, scheduled for 2pm — half an hour before RBA Governor Glenn Stevens releases the meeting statement.
That statement will be read closely to see if there are any further references to rising property lending and rising house prices. Most likely there will, and that will see another flurry of “bubble” stories.
How many references will there be to what’s been happening in the sharemarket since the start of July 2012? By the close of business yesterday, September 30 (the end of the first quarter of the new financial year), the AX’s main indicators, the ASX 200 and the All Ordinaries Indices, were up by around 26% over the past 15 months.
In the year to June, the market (as measured by the ASX 200) was up by just over 17% (and balanced super funds rose by around 15%). But up to last Friday, the ASX 200 was up 10.5% for the quarter so far, although by the close yesterday that had been cut to around 9% because of the big fall generated by the growing concerns about the antics in Washington.
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Sharemarket rises of this size are greeted with applause — the wealth effect at work for many, especially brokers and a fund managers who clip fees and get paid on performance. The Coalition’s media cheerleaders have been trying to sell this as Tony Abbott’s election wealth effect.
If there had been a 10% rise in house prices in the quarter, then every pet shop galah would have been screeching “house price bubble”. The stockmarket is exempt from that herd-like thinking. There are plenty of reasons why the sharp rise in the market isn’t a bubble. Interest rates are low, dividend yields are still high, corporate profits haven’t tanked; the impact of the high Australian dollar has been massive, but so has the desire of big global investors for exposure to the Australian economy.
In comparison, house prices have risen by less than a third of the rise in the ASX over the past year. RP Data said last week that Sydney house prices are up 8.2% and Melbourne’s by 5.3%. We have yet to see the 10+% annual price rises seen in the early years of the last decade that helped bring the property crunch of 2003.
It’s not just equities where the pet shop galahs are inconsistent. They all missed the corporate loan boom in 2005-07 which collapsed once the GFC swept through global markets in 2008, triggering corporate collapses and billions of dollars in dud loans by the banks and others to finance companies, property and tourism groups, and the odd miner. More money was lost by banks in lending to dud brokers such as Opus Prime, and dud finance groups, such as Allco and Babcock and Brown, than were lost in home mortgages.
A similar confusion saw the early 1990s galahs — some of them are still around — conflating the big property bust of the early 1990’s with its real source, the unchecked commercial property lending that took the ANZ and Westpac to the brink of collapse. Remember the billions lost by the Westpac finance arm, AGC?
RP Data also pointed out one very important factor that most bubble-istas do not focus on; the shortage of homes for sale in most markets, especially Sydney. The number of properties for sale in Sydney is down around 28% on a year ago and nearly 14% for Melbourne.
Housing supply is an issue that’s dropped off the political agenda since 2010, when it had the status of a COAG action item, etc. But the problems haven’t vanished — as we’re now seeing, the innate problems of housing supply in some key markets remain.
So the property price rise is coming from rising demand meeting falling supply, which usually means rapidly rising prices. Eventually that will be halted by a rise in the supply of homes for sale.
The RBA’s concern isn’t about a “bubble”, but about the mix between new home construction and lending for purchase of existing stock, the enthusiasm of the self-managed superannuation sector for property investment (commercial and residential), and the exposure of the major banks to the more problematic New Zealand housing market.
Some don’t realise how much money self-managed super funds have invested — some claim it is only $18.5 billion. And yet, working on RBA estimates, it could be as much as $80 billion — the RBA points out that self-managed super funds have around $600 billion in assets. APRA points out that at June 30, a third of all mortgages were held by investors, for a total of $373 billion, which was 8% higher on June 30, 2012. Not all these loans are held by self-managed super funds, the majority are still with individuals. Interest-only mortgages are the favoured form of housing finance for investors (they fix the return for the life of the loan, three or five years, so the tax benefits are clear and predictable). The APRA figures show that 111,000 fixed-term loans were issued in 2012-13. Many were issued to self-managed super funds.
Claims from the self-managed super fund industry and its team of pet shop galahas that the RBA and others are being alarmist are not borne out by some instances — Storm and Trio Capital. Two separate financial black holes where investors, including self-managed super funds, lost heavily — just as we are seeing the same class of people operating in the negatively geared investment sector.
There’s no bubble at the moment, but we’d be wise to heed the concerted warnings of the financial regulators about the self-managed sector.