2020 - Will APRA be forced to intervene in the Melbourne and Sydney Property Bubbles?

With property prices at fall steam ahead, Melbourne and Sydney are expected to be at post bubble heights in very early 2020. This is the same heights and surging growth that forced APRA to act in 2017.

Will APRA be forced to act in 2020? If so, how much do you think Melbourne and Sydney property prices will fall in 2020 and into 2021? We will see a repeat of 2017/18?

 

Define bubble?

 

My personal opinion is it'll just go back to where it started pre-correction provide the narrative in mainstream media stays staus quo.

I don't think we're going to see stockmarket style "boom/bust" volatility.

Not unless something else happens e.g. HK/China situation escalation, one of a million international political scenarios explode (e.g. US/Russia/Korea/M.E), Trump impeachment/US elections, global equities crash/correction, etc. If nothing happens, then I'd expect some negative noise & sentiment coming into the next Australian election (2022) when labor forms up another threat for government.

 

The glitches are on the horizon - recession looming, low jobs growth (negative in the most recent results), continued poor wages growth, continued casualisation of the workforce, ongoing drought, reluctance of banks to lend to coal miners, lower consumer confidence & spending etc.

That's just locally.

 

I would probably define it as anything more than twice wage/income growth.

Melbourne currently has the highest wage growth of 2.9%. Home prices in Melbourne are increasing at 2.27% a month (27% annualised), hence 12x wage growth!!!

Sydney has wage growth at just 2.3%, yet home prices are increasing at 1.66% a month (20% annualised), hence 8.7x wage growth.

Another measure could be household debt - as you know Australia has the 2nd highest level of household debt in the world. Prices increasing faster than wages will only push us into number 1 place and make our economy and banking sector even more vulnerable if their is a global shock (or a domestic one - as Scott says above, our economy continues to deteriorate despite being promised a Liberal Strong Economy at the election)

 

So is the share market in a bubble as well then, because based on that logic any decent investment would be a 'bubble' as wage growth is only 2.3% per annum? Am I misunderstanding you?

 

What are company profits doing at present (excluding banks/insurers which have made write downs for their excesses etc)?

Retailers providing for outstanding liabilities for the underpayment of wages...

Miners who have fallen out of favour.

Our manufacturers who are slowly disappearing.

 

I think this is a good question and a reasonable scenario to consider. There would be discussions about this behind closed doors for sure.

Things are a bit different this time though, given the fact RBA is desperately trying to juice the economy any action by APRA would need to be very measured to not completely derail/reverse the benefits of the interest rate cuts.

Plus some of the systemic issues that APRA were trying to correct have been fixed. House prices are rising now not because of higher risk lending but more the lower cost of credit.

Also, once again this is a two state phenomenon. If overly exuberant Sydney and Melbourne buyers cause a regulatory response that derails our long overdue Perth recovery and Brisbane boom I am not going to be happy! At some point there may seriously be an argument for location specific controls

 

Bears can’t have it both ways.
If property is overpriced and unaffordable then why do you think it will be so necessary for regulators to slow its growth?

Oh unless it’s actually still affordable and people see it as worth the prices

 

Probably why I'm not an economist but I've never quite understood why interest and mortgage rates to be applied for housing finance cannot be applied on a State-by-State basis. It doesn't seem that it would be too difficult to achieve in this modern world of computer systems and would allow fine tuning of the economy where its required.

 

Something about it being unconstitutional prolly, goes against the spirit of the constitution, the vibe, Mabo, fair trade between states, no trade barriers within the country etc.

 

Probably because it is impractable. Why would you ? How could you ? How would it be applied to the security or to the purpose ? Would you be constantly changing policy chasing out of date data based on past price movements ? Market cycles vary enormously with in states. How would it apply to Victoria where everywhere except parts of Melbourne have boomed until recently. Now that as flipped by the time the data comes out policy would be arse about. There is already absurd policy where you can get loans for poor performing property based on post code, that perpetuates the growth that satisfies banks. and hence debt and poor cashflow and reliance on borrower retaining a satisfactory wage . Where cash flow positive, wealth producing properties languish in price and are charged higher interest rates because they don't grow as much. Such selective reactive policies are part of the problem not the answer.

 

(haven't thought too deeply, but this comes to mind). States would need operate under separate currencies, which is one of the main flow through transmission mechanisms of rate changes. Changes to rates change money supply up or down. To apply individual money supply changes (rate changes), you would need different denominations across states. I.e. will need different currencies in each state. Euro area is a good example, one currency, one monetary policy.

 

Also, APRA intervention is probably a long way away.

Specific intervention would depend on the risks that arise as more debt is taken up. There'd need to be a sustained 20%+ p.a. price growth, not a one off adjustment. I.e. will need it to go for a little while, beyond 2020 growth cycle I think.

If the risks are IO - they could come back with price based intervention. If its INV lending, there'd probably be price based intervention again. If its borrowing/debt levels (doubt it), they'd simply adjust serviceability rates if they needed to. If its LVR issues, deposit caps can be introduced (this would be politically ugly though).

If I use a crystal ball and narrow down on their next specific major action: Non-banks.

- 2020 non-bank investor exposure rises substantially (on the back of weaker credit policies). They aren't playing too far away from the main market anymore and will continue their rapid market share expansion. They now have the product set to incentivise demanders of credit (cheaper rates, decent products, etc). This time it'll be mum & dad investors. This will probably drive market up too, with simple/easy access to credit again at decent terms across the marketplace.
- The macro-financial risk of this has been shifted to non-bank space (non ADI's) who don't operate with same credit risk framework as APG223 (lending rulebook). Overall, this isn't too bad. Until a few years ago, APRA didn't care or have purview over this. They've asked Treasury to be able to monitor them & soon enough this rapid rise may cause some level of concern.
- If the market runs at a rapid rate in 2020 & 2021 (very possible), than a look under the rug will show that system wide lending growth is being driven by the above.
- APRA will eventually crack down on this.

For now though, I don't think there'll be much intervention for the next 12 months.

 

I had predicted that RBA and APRA not reducing interest rates and tightening lending criteria will drive Australia into recession and I was 100% correct.

The only reason we are not in recession, yet, is that libs managed to stay in power and we have had some interest rate lowering plus some easing of lending from their very silly criteria.

Nevertheless, we need 0% interest rates (or even negative) Plus some further easing of lending coupled with tax cuts and quantitative easing among many other things to avoid recession or possible depression.

If we have any form of lending tightening in the next few years I believe it will be a case of depression.

Sydney and Melbourne property must go higher by at least 1% to 2% year on year if we are to get the economy up and running.

 

hows that? The rba did lower rates, and you dont know what would have happened otherwise.

 

This is exactly the circumstance where you would look to slow its growth?

And in regards to people seeing value, perhaps the Australian narrative, both socially, politically and economically, for the past 30 years has been so property centric that people aren't seeing worth, but they are just doing what they have been brought up to do.

We are the 14th highest GDP in the world yet ranked 90th in economic complexity (below Uganda and Senegal). Our wealth policy is to trade property. We currently have our interest rates at emergency measures, unless you don't consider the GFC an emergency, of which our interests rates are a quarter of what they were at that time.

And what's the emergency? House prices aren't doubling every year? The really scary thing is that because our economy is so connected to the property, that might just be an emergency. The next downturn will be a catastrophe.

 

Come on! Do you seriously believe that we are below Uganda or Senegal? You comment is a classical example of information bias, the fact is that people will find what are look for to reinforce their bias. (That's why we have flat earth societies and so many young earth creationists )

I think we are all bias to a certain extent, I rather be optimistically bias than pessimistically bias. Waiting for the sky to fall is not the way I want to live my life...

 

I really don't know that I'd compare information sourced from The Harvard Kennedy School's Center for International Development to young-earth creationists or flat earthers.

A separate source, The Observatory of Economic Complexity puts Australia at 59th in 2017 (behind Kazakhstan and Kuwait) - OEC - Economic Complexity Ranking of Countries (2013-2017)

What sources are you presenting?