Ballooning house prices caused the October interest rate increase, so the question all Australians will now be asking is whether dwelling prices are likely to fall given the prospect of further interest rate increases in the months ahead.
The short answer is ‘no’, because the underlying housing demand is strong; NSW is artificially holding back dwelling supply and most people have factored into their loan repayment sums an interest rate increase.
In addition, Reserve Bank governor Glenn Stevens must be careful with rate rises because he is playing a dangerous global game which, if overplayed, could see the Australian dollar go well beyond parity with the US dollar.
But have no doubt that Stevens is scared of a housing bubble.
When you read Stevens’ statement that accompanied the interest rate rise, most of the forces he identifies in his discussion of how the world is changing are benign. The only Australian force that is out of control is housing prices which he says: “…have risen appreciably over the past six months”.
Stevens does not want to cause a big fall in dwelling prices but he wants to stop rapid escalation. In my view, to do that he is going to have to lift rates further and/or make a series of threats that frighten people. The underlying housing demand is such that another quarter of a per cent increase will not make much difference but after that rate rises will start to bite.
I must underline that Stevens has only one weapon to curb house prices – interest rates – and when he uses that weapon there are nasty employment side effects.
Working against Stevens to boost house prices is the desire of Australians to live in large cities which boosts underlying demand. It is the willingness of banks to lend very large sums to consumers on most types of dwellings, but their reluctance to lend to developers of dwellings (so squeezing supply) and myriad government forces – particularly in NSW – that restricts the supply and boost dwelling costs.
There is a flood of Australians pouring into Melbourne which is sending dwelling prices skyrocketing, but Victoria is creating a massive re-zoning plan to accommodate around 500,000 people in Melbourne and Geelong and an inner city development plan to create another huge number of dwellings. But the trek south is of gold rush proportions so the Victorian Government moves may not be enough – at least that’s what the housing market is saying.
NSW is freeing up some zoning, but the way it treats apartments illustrates that Sydney is happy to let Melbourne become Australia’s largest city.
Companies like Mirvac and Stockland, plus, of course, Babcock, are selling parts of their Sydney land holdings to Harry Triguboff, the only major apartment developer who can build apartments in Sydney because he does not need to borrow money.
To illustrate the Sydney apartment building problem let’s do some back of the envelope calculations. Let’s say the cost of an apartment comprises $100,000 land; $250,000 building and a $70,000 government slug – a total cost of $430,000. To that you need to add interest, delays, selling commission which takes the cost to the $480,000/$500,000 level – that’s approximately the current selling price, so there is no profit for the developer. And banks won’t lend to the developers.
On the Gold Coast the collapse of City Pacific has killed the supply of funds and in Brisbane Harry Triguboff is building a massive apartment tower, but four other major projects have been mothballed. Perth is enjoying a resources renaissance. So, in our four major capitals there is a supply problem causing the price escalation that Stevens is tackling with higher interest rates.
But just as Australia lifts interest rates the US dollar is going into freefall on the back of massive moves in the oil market, which is multiplying the Australian currency rise.
That rising Australian dollar will hit a lot of jobs – particularly in the labour intensive tourism areas.
This article first appeared on Business Spectator.
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