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Thursday, 12 December 2019

Is there further tightening in the post?

Screws loose

CNBC ran a piece yesterday on whether mortgage lending standards should be tightened in response to rising housing prices. 

A couple of thoughts.

Firstly: no.

And, secondly: how is this even a thing?

Unless there's clear evidence of pro-cyclical loosening macroprudential measures should be set-and-forget. 

Applying macro-pru fine-tuning as an independent arm of stabilisation policy complicates both the role and accountability of the Reserve Bank (which is having enough trouble meeting its targets as it is).

Since we're all marginal borrowers at some point, over-zealous macro-pru chokes off the credit supply to the economy - small business owners also use equity from housing - and exacerbates wealth inequality by shutting out low income earning homebuyers at lower price points.

Macro malaise

Regardless of the above standpoint, the macro data sets make a very flimsy case for tighter credit.

The most dangerous phase of any market cycle is when complacency sets in, and while the media focuses excitedly on auction clearance rates in a few inner-Sydney suburbs, developers are going bust at an accelerating rate. 

And, don't forget, there have been some high-profile collapses lurking beneath these headline numbers, including the Ralan Group. 

Tradies, retailers, and realtors aren't faring any better.

Housing market 'soft landings' are notoriously tough to engineer.


Because once dwelling construction dries up the multiplier effect grinds dangerously into reverse, and already we've seen unemployment trending higher throughout 2019. 

Building approvals are now down by 30 per cent and are still being crunched lower.

Credit slump

As for choking off the credit supply...what? Annual housing credit growth hit a 43-year low in October as more and more loans switch to repayment schedules.

Investor credit growth is actually negative, which has never happened before, even in the deepest of recessions. 

And total credit growth is in a dreadful state at just 2½ per cent and falling fast, which is a recessionary trend by any other name. 

So unless the masterplan includes invoking the cleansing gusts of Schumpeter's gale, a fresh salvo of macro-pru seems unlikely.

The wrap

An excruciating set of numbers, and hardly a data suite that warrants further tightening, with housing prices lower than a year ago and well down from their 2017 peaks.

Indeed housing prices have been falling for years in Perth, Darwin, and many regional Queensland markets.

Any 'leaning against the wind' approach to macro-pru would need to account for these divergences to make sense, which raises the unwelcome spectre of a regulator-acting-as-1970s-bank-manager farce (not the type of retro most aspiring Gen Y first homebuyers should hanker for). 

Continual tweaking in a vain attempt to cushion us from all stressors is a route to fragility in financial markets, not robustness, and second-guessing capitalist acts between consenting adults is also prone to error.