Mark Bouris v Chris Joye in unexpected housing bubble debate
The housing bubble debate has seen two close allies now take separate corners of the boxing ring.
This morning on twitter its been economist Chris Joye versus mortgage broking entreprenuer Mark Bouris.
"Be careful of reading a beat up story about a housing bubble ! We have only started to recover why can't they give us a break," Bouris tweeted in response to Australian Financial Review columnist Chris Joye's article headed, "Why we should be worried about Australia’s housing market".
"Good confidence readings and low interest rates do not equal bubble . They show recovery and the RBA program is working," Bouris added.
Joye had argued he was "worried about Australia’s housing market."
"Very worried. Not so much about the fundamentals, which are solid. Or current performance, which is robust without raising alarm."
But he said he had concerns about what lied around the corner.
Joye has regularly demonstrated that domestic housing costs have tracked, or slightly under-clubbed, disposable household income growth since 2003.
He noted amid forecasts of catastrophic gloom in 2008 and again in 2011, he attracted criticism for publishing reassuring views.
"But I no longer think the situation is so benign.
"The RBA’s rate cuts have gone too far.
"And if they stay this low for too long, there is a real chance Australia could, belatedly, have an acute housing crash with real consequences for the economy."
He says this is not his current central case, but several factors have given him pause.
"The first is that households have not really deleveraged despite much spruiking about our cautious consumers.
"Australia’s elevated household debt-to-income ratio, which looks set to climb further, is not far off the all-time, pre-GFC peak.
"This highly leveraged consumer is an artefact of Australia’s even more leveraged banking system.
"The major banks are leveraged about 80 times across their $1 trillion home loan books.
"Put differently, they are only holding about $1.25 of true loss-absorbing capital against every $100 – as opposed to the “risk-weighted” value – of their assets.While banks do not “mark to market” their mortgage books with current prices because they account for them on a “hold to maturity” basis, with such extreme leverage you only need a small drop in asset values to make the banking system theoretically insolvent (assuming market prices)."
He noted a third issue was that the banking system was under tremendous pressure to maintain its internationally lofty returns on equity.
Joye also pointed to "a stunning" 33% of new home loans are being advanced with LVRs greater than 80%.
"In some countries they don’t even allow banks to lend at these levels, period.
"Of course, since the RBA has taken the easy option of slashing borrowing costs to their cheapest levels in history, consumers are being given every incentive to gear back up.
"My fear is that the longer rates remain at all-time lows, the greater the likelihood borrowers will believe that this is some sort of 'new normal'.
"That they will extrapolate out from the recent past to the future.
"The complacency is compounded by the fact that Australians have not experienced a recession in 22 years.
"Most have never endured a bona fide housing rout either," Joye said.
