Everybody's Talking House Prices

One Step Beyond The Piketty-Fence

One of the more curious aspects of the burgeoning inequality is that it is more generational than class oriented. As society ages, you see that there are gobs of elderly people with assets and lots of young people in debt. The older generation says, "we had it tough when we were young,"ignoring how distorted the maths has become to the point that the young will not get a shot at the same sort of asset accumulation without inheriting it. In the past, this sort of thing was great impetus to go on a colonial exodus but there are no more frontiers on a globalised world. We are now so deep into the consolidation of the world that average wealth in the formerly advanced nation is deflating down to the emerging markets where their average wealth is rising.

All of this is to say that in a country like Australia, its unlikely the younger generation will be accusing the kinds of a sets accrued by the older generation today.

Which brings us to this interesting article today.

Piketty reckons we're on our way back to the drastic inequality of earlier centuries and recommends a global wealth tax be imposed to prevent it. 

In the current edition of The Economist, young Matthew Rognlie says he thinks Piketty missed some important points.

In a new paper presented at the Brookings Papers on Economic Activity in March, Rognlie fingers what may be the major flaw in Piketty's influential book: It's not the return on capital per se that has been soaring beyond economic growth since 1970, but just surging house prices. 

Rognlie says the return on non-housing wealth has actually been remarkably stable.
He has other arguments with Piketty but the housing insight is the hot and challenging one.

This is interesting because if all other asset classes remain stable in their returns over a long period of time and it is real estate that is somehow skewed to be higher, then it stands to reason that people would enter the real estate market over other asset classes. Kind of explains the moral hazard inherent in the Property Bubble that has been blown into existence by the central bankers - and they did this through faulty CPI calculations. Still, we have what we have, and the solution to the problem is not palatable to those who have.

But that's only part of the solution to the housing problem. If any government took that problem seriously and could ignore the rent seekers, medium density should be the default option for cities like Sydney. Anyone with a suitably sized block of land or any group of willing neighbours should be able to build a fashionable row of terraces instead of their isolated boxes, if they so wish. 

Those who prefer their own quarter acre would, of course, be welcome to it, and the land tax that it would incur in a rational nation interested in sensible tax reform.
So put your hand up if you're genuinely interested in a fairer society, in preventing increasing inequality, in making housing more affordable for your children, in living in a more efficient, greener city with better infrastructure, and, effectively, freezing housing prices and restoring individual property rights? 

I think I just lost the owner-occupier and NIMBY vote.

Such is life. Yet the working definition of inflation is too much money chasing too few assets. The  fact that the rise in property prices haven't shown up in CPI calculations tells you something about Central bankers and which side their bread is buttered.
Anyway, people are still incredulous that there is a Bubble going on.

Despite almost 30 per cent price growth in Sydney over the past two years and strong 15 per cent growth, too, in Melbourne, Dr Wilson doesn't believe there is a bubble in Australian house prices, nor does he anticipate any sort of collapse. 

Responding to the Reserve Bank's latest jawboning about the high level of investors in the Sydney and Melbourne property markets, he said: "There's no prospect in the foreseeable future for a sharp fall in prices without a sharp rise in interest rates, which is the main catalyst for a housing correction." 

While interest rates will eventually rise, he points out: "Clearly, the environment is for flat or falling rates to stimulate a weak economy." 

Then, there's the housing shortage.

That reads like the perfect denial: There is no Bubble and it won't pop. The black swan says hello.

Let's imagine a scenario for a moment that something catastrophic happens in China and the property market pops because the leveraged banks call in all the debts at once. Everybody panic sells and prices crash. The RBA would cut rates further from the historic lows where they sit. If the plunge is bad enough, the RBA will go to ZIRP to shore up the banks. Worse still, if there's not enough liquidity to cover the whole system, the RBA will print money by unleashing its own QE programme. A rise in interest rates would be the farthest from anybody's minds in that context. And there may even be people who think, "we should borrow money now with this record low interest rate and buy a house..."

So even in the most catastrophic situation, you can see that somebody is going to be in there buying up on ZIRP money and borrowing from banks propped up with QE money. Which is exactly where America is at right now.  The market's broken because the interest rate is sitting at zero. Nobody is making sensible decisions about money because at zero interest rate, you can't. You'd be a mug not to borrow as much as you can, right up to the edge, and over the edge and down by the river; seasons will pass you by the rates go up, you go down... but until that day, you're under no threat so you make hay by borrowing everything at zero capital cost.

That scenario suggests the Property Bubble can't pop because the central banks won't let it pop - which is kind of a crazy-scary notion. We're saying that the central banks will indefinitely put off the endgame. If the endgame never arrives, the status quo can be kept and rack up as much debt as it likes - at zero interest - and you just keep on going doing what you're doing.
How is that not a moral hazard?

The flip-side to all of this is that the RBA is most unwilling to raise interest rates in fear of the bubble bursting. If it's worried about the overheated housing price, there's really only one medicine: jack the interest rates up to historical norms. Let deflation set in if it must, but tame the damn Property Bubble. The fact that they haven't (and won't) indicates the people who set the policies themselves are so deeply in with the Property Bubble they couldn't possibly do it. Nobody wants to die, but nobody wants to take the medicine. The rest of it is trying to stretch out the limbo as long as possible.

Somehow, somewhere along the line, we really screwed the pooch.