This is part of Mr Macfarlane (Governor) talk to CEDA Annual General Meeting Dinner on Melbourne - 13 November 2002
http://www.rba.gov.au/Speeches/sp_gov_131102.html
Residential Property Prices
It is not surprising that house prices have risen a lot over the past half decade or so. With Australia’s return to being a low-inflation economy, the general level of interest rates, including mortgage rates, fell to less than half their level of the previous decade. This enabled households to take on higher levels of debt, which they did, with most of it put towards buying better and more expensive houses. If a decade ago we had known with certainty what was going to happen to inflation and, hence, interest rates, we should have been able to predict this outcome. The difficult part, however, is to determine how much of the rise in house prices was the logical outcome of this economic adjustment, and how much, if any, indicated overshooting or bubble-like behaviour.
My guess is that nearly all of the rise in house prices was in the first category, and I have been very reluctant to conclude that any was in the second category, at least until early this year. But when it became apparent that over the past year or so an exceptionally high proportion of lending for housing was being directed towards investors rather than owner-occupiers, we at the Reserve Bank started to become concerned. In fact, the figures we presented in our Statement on Monetary Policy showed that over the year to August, lending approvals to investors rose by 42 per cent, while approvals to owner-occupiers rose by 1 per cent. Something very unusual was clearly happening, and this was confirmed by the building approval figures showing much stronger increases for apartments than for houses. All this, of course, was occurring at a time when owners of investment properties were having difficulty in finding tenants and when rents were falling.
It seemed pretty clear to us that investors were moving into an already over-supplied market, and this behaviour could only be explained by their usual desire for tax minimisation plus their expectation that they would benefit from future large capital gains, an expectation which was encouraged by the marketing programs employed by developers of investment properties.
Recent events, however, suggest that the market is actually beginning to work, if belatedly, as it is supposed to. There is certainly a change of sentiment as indicated by the numerous stories in the press highlighting potential over-supply and urging caution on the part of would-be investors. There is also evidence from micro-data that apartment prices have flattened out or fallen in the September quarter. By micro-data I mean the detailed suburb-by-suburb, or even building-by-building, analyses that are carried out by the research firms that sell data to the real estate industry, some of which we quote in the recent Statement. Thus, although lending for investor housing has not slowed yet, we have the unusual situation where most of the finance available for housing is going into the sector where prices are rising least, or not at all. This is likely to be a transitory phase. Finally, we are now reading accounts of how some large multi-unit developments that were planned to start construction have been shelved because of insufficient pre-commitment by investors to get them started. This has to be a good development as it will limit the extent of over-supply, a fact that is appreciated by many in the property industry.
Conclusion
My final comment on house prices is that what we have seen – a very high rate of increase in residential property prices and excessive lending for investment properties over the past year or so – was a problem of coping with success. We only have to remember that if we had followed the experience of previous decades, the rise in property prices would have come to an abrupt halt three or four years ago as a result of the economy entering a recession. It is the length of this expansion, as much as the other things I have described, that provided the environment which encouraged this type of investor behaviour.
http://www.rba.gov.au/Speeches/sp_gov_131102.html
Residential Property Prices
It is not surprising that house prices have risen a lot over the past half decade or so. With Australia’s return to being a low-inflation economy, the general level of interest rates, including mortgage rates, fell to less than half their level of the previous decade. This enabled households to take on higher levels of debt, which they did, with most of it put towards buying better and more expensive houses. If a decade ago we had known with certainty what was going to happen to inflation and, hence, interest rates, we should have been able to predict this outcome. The difficult part, however, is to determine how much of the rise in house prices was the logical outcome of this economic adjustment, and how much, if any, indicated overshooting or bubble-like behaviour.
My guess is that nearly all of the rise in house prices was in the first category, and I have been very reluctant to conclude that any was in the second category, at least until early this year. But when it became apparent that over the past year or so an exceptionally high proportion of lending for housing was being directed towards investors rather than owner-occupiers, we at the Reserve Bank started to become concerned. In fact, the figures we presented in our Statement on Monetary Policy showed that over the year to August, lending approvals to investors rose by 42 per cent, while approvals to owner-occupiers rose by 1 per cent. Something very unusual was clearly happening, and this was confirmed by the building approval figures showing much stronger increases for apartments than for houses. All this, of course, was occurring at a time when owners of investment properties were having difficulty in finding tenants and when rents were falling.
It seemed pretty clear to us that investors were moving into an already over-supplied market, and this behaviour could only be explained by their usual desire for tax minimisation plus their expectation that they would benefit from future large capital gains, an expectation which was encouraged by the marketing programs employed by developers of investment properties.
Recent events, however, suggest that the market is actually beginning to work, if belatedly, as it is supposed to. There is certainly a change of sentiment as indicated by the numerous stories in the press highlighting potential over-supply and urging caution on the part of would-be investors. There is also evidence from micro-data that apartment prices have flattened out or fallen in the September quarter. By micro-data I mean the detailed suburb-by-suburb, or even building-by-building, analyses that are carried out by the research firms that sell data to the real estate industry, some of which we quote in the recent Statement. Thus, although lending for investor housing has not slowed yet, we have the unusual situation where most of the finance available for housing is going into the sector where prices are rising least, or not at all. This is likely to be a transitory phase. Finally, we are now reading accounts of how some large multi-unit developments that were planned to start construction have been shelved because of insufficient pre-commitment by investors to get them started. This has to be a good development as it will limit the extent of over-supply, a fact that is appreciated by many in the property industry.
Conclusion
My final comment on house prices is that what we have seen – a very high rate of increase in residential property prices and excessive lending for investment properties over the past year or so – was a problem of coping with success. We only have to remember that if we had followed the experience of previous decades, the rise in property prices would have come to an abrupt halt three or four years ago as a result of the economy entering a recession. It is the length of this expansion, as much as the other things I have described, that provided the environment which encouraged this type of investor behaviour.
