Finally, the housing boosters are confronted by realists who say this should be a big downturn. Also, Henry's lonely position on monetary policy has been supported by none other than Warwick McKibbin, former RBA board member. And RBA chief Dr Philip Lowe, who said it well in 2002 but seems to have forgotten his younger self's brave views.
First to house prices. Adam Creighton says: 'Housing market teeters'. Henry knows a bloke who says, given the size of the housing boom, Australia's housing market will fall by 50 %. This seems a bit extreme for this modest commentator, but it is certainly not beyond the bounds of possibility.
The same bloke points out that Australia missed the worst of the GFC downturn because China was buying Australian resources like there was no tomorrow. Now China is struggling and the global boom is lead by America. But America's boom is built on Trump's tax cuts and increasing debt levels. It cannot last, and Trump's trade war has the potential to end global prosperity. This is the scenario for a fifty per cent drop in global shares and Aussie house prices. Current low levels of cash interest rates and the still-not-achieved budget surplus will leave little room for domestic stimulus in the global worst case.
And now to the youthful Phillip Lowe. Adam Creighton puts it so nicely: 'Working at the Bank for International Settlements in 2002, he argued, in a highly influential academic paper written with Claudio Borio, that central banks should raise interest rates to ward off unsustainable housing bubbles. “Sustained rapid credit growth combined with large increases in asset prices appears to increase the probability of an episode of financial instability”.
“While low and stable inflation promotes financial stability, it also increases the likelihood that excess demand pressures show up first in credit aggregates and asset prices, rather than in goods and services,” Lowe and Borio wrote:
Warwick McKibbin makes a statement that I believe is virtually impossible to dispute. ' “They should have started lifting rates when Philip Lowe became governor in 2016. That was the right time,” he tells Inquirer, suggesting the official rate could be around 2.5 per cent now, rather than 1.5 per cent. The Reserve Bank repeatedly has suggested the next move in official rates will be up. But few expect that to happen for at least a year.
“If you came down from outer space and read the Reserve Bank’s statement on monetary policy last week, you’d see how it’s so optimistic — strong jobs growth, strong growth alongside a strongly growing region. You certainly wouldn’t pick an official rate of 1.5 per cent,” McKibbin says. “The real rate is even negative.” Inflation was 2.1 per cent across the year to September, a little lower than wage growth, which was 2.3 per cent'.
My modest comment last week was: 'There is little doubt that there was a case for the RBA to begin normalising cash interest rates two or three years ago, taking the steam out of house prices in the process. Equally, there was a good case for the Abbott-Turnbull-Morrison government to work harder to reach budget surplus at about the same time, meaning by now Australia would be paying off government debt.
'Higher cash interest rates would have discouraged the greatly overdone household debt bubble, which now puts Australia a world leader with a dangerously overheated consumerist culture. Other ways to encourage household saving would have helped install a more saving-friendly culture. Yet the only policy with relevance to saving, taxing 'excessive' superannuation balances, was a clear anti-saving policy.
'Most importantly, normalising cash interest rates and budgets , and encouraging rather than discouraging household saving, would have put Australia into a far stronger position when the next global downturn occurs'.
More from Adam Creighton here.
Fiona Prior alerts us to an important exhibition at the Art Gallery of New South Wales.
'“William Kentridge emerged as an artist during the apartheid regime in South Africa. Grounded in the violent absurdity of that period in his country’s history, his artworks draw connections between art, ideology, history and memory. They reveal the ways in which ideas and images echo across time and between different cultures.'
Fiona Prior sees Steve McQueens latest thriller 'Widows'. More here.
The women's cricket team progress well at the world cup. My theory of why women do better than men in global cricket competitions is that in Australia women get a better opportunities than women in almost every other nation. Please do not misunderstand, gentle readers ,I am not denigrating the men, they have had it so good for so long, any temporary setback must be accepted as part of the great circle of life.
Soon the blokes will be playing, is it India, with yet another chance to begin the long road back to the top of global cricket. We wish them well, and Bert Thornton has arranged tickets to an ODI game on Friday, with a grand dinner in the Jimmy Styne room at the 'G'.
Image of the week - Housing dreams fade