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'I have a solution to our property price problem'

By Peter Switzer

I have a solution to our property price problem but will the Turnbull Government have the guts to try it? Before I reveal it and await reactions from those smarter than me, here’s the current situation with property here in Oz.

The market right now

If you’re buying properties in Sydney or Melbourne, you really need to do your homework because the bubble word is starting to be used and it’s starting to even worry me a little. As for buying anywhere else, I’d be careful of Brisbane apartments in and around the inner city. Most other areas are not stressing officialdom.

I’m not alone being a little worried, with the Reserve Bank of Australia and the Australian Prudential Regulatory Authority (APRA) getting a tad nervous, though they still haven’t uttered the bubble word.

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Also read: Why an interest rate cut is needed


Why won’t they mention bubble?

Well, because on present criteria, many of the buyers/ borrowers can service their loans and have sufficient collateral to justify a bank trusting them with their money. The risk would be that things might change.

The Trump effect

As I reflect, Donald Trump and China (now there’s two strange bedfellows) could prick this ballooning house price story in Sydney and Melbourne!

Ironically, it’s those two characters who make me sleep easy at nights and not be too worried about the madness happening at auctions every Saturday in Sydney and Melbourne.

Donald Trump has added positivity to the US and global economic outlooks, which delays the eventual recession that, one day, will show up in Australia. A recession, which brings rising unemployment, would bring a lot of borrowers undone. And the resultant oversupply of properties on the market would bring price crashes to many suburbs where buyers have taken a huge punt.

What about China?

China is also a big help to global growth. Yesterday, its decision to scrap its import restrictions on the products of companies such as Blackmores, A2 Milk and Bellamys showed what it can do to share prices and corporate confidence.

Even the IMF has upgraded world growth, which is good for a country such as Australia, which thrives off a greater global economic setting.

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And the Reserve Bank?

Of course, the Reserve Bank, which didn’t use the B-word in its minutes released this week, says there is a “build up of risks” (that’s the wording of the Big Bank), while “bubble” is oh so media or can be used by an economist looking for attention.

Those minutes told us that:

  • The RBA is optimistic on the Oz economy, medium term.

  • The housing sector and its price increases in Sydney and Melbourne is a concern.

  • The pending oversupply of apartments — basically in Brisbane and Melbourne — is an upcoming issue.

  • The rise of investors borrowing is a concern.

  • And so is a slow growth in rents.

What used to happen?

In the old days, the RBA would simply raise interest rates. In the past, concerned central bank bosses have opted for two quick rate rises in a row. Maybe one would be 0.5% and not an expected 0.25%. However our economy isn’t strong enough for that right now.

With wages growth slow but with hopes that things will improve slightly this year, and business investment still not in gangbusters land, the RBA can’t simply raise interest rates.

Also, such rate moves would push up the Oz dollar over 80 US cents and hurt economic growth.


What about now?

The RBA is caught between a rock and a hard place. They really wish homebuyers and investors would stop buying properties or potential sellers at least started putting their homes on the market to increase supply to depress price rises.

Back to Trump and China

In a perfect world, our economic saviours, Trump and China, help us grow stronger, which makes it easier for the RBA to raise rates, which might then spook the bolshy buyers out there who have become addicted to property.

Of course, the irony is that if the Trump/China story works over the next two years, interest rate rises could surprise a few thousand borrowers out there and the mechanics of a property price turnaround will be put in place.

I’m certain Mr Trump will help create an economic boom and then a recession and that’s when a bit of good sense will return to property prices. But that’s a story for another day.

For the bubble worriers

In case you’re a bubble worrier, the head of APRA, Wayne Byers, spoke yesterday at the Australian Securities and Investments Commission (ASIC) annual forum and refused to utter the “bubble” word, instead opting for the “B-word” reference.

This was his take: “I don’t use the B-word. I refuse to use the B-word. It implies a binary, that’s too simplistic,” Mr Byres said.

“We are in an environment of heightened risk. House prices are high and particularly in this one (Sydney) they’re rapidly rising.” (SMH)


And the Treasurer?

Given the problem the RBA has with raising rates now to take air out of the balloon (not the bubble), in his May 9 Budget, Treasurer Scott Morrison is tipped to come up with a property price play policy. And here’s a policy option worth thinking about.

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So, what’s the solution?

Labor wants to kill negative gearing for existing homes but leave it for new homes but that could make investors chase new stuff because this is where the tax deductions are. It would be good for getting building going but younger people largely buy new homes in cheaper areas so investors could crowd out that market.

A Switzer suggestion

Why doesn’t the Government close down negative gearing for two years to take the heat out of the Sydney and Melbourne markets? I think taking it away forever could lead to a price collapse and it reminds me of Labor imposing a mining tax just when the mining boom was about to start de-booming.

The Government might be able to restrict negative gearing in Sydney and Melbourne for two years, which sounds very prescriptive but why not think outside the square?

Those who despise negative gearing forget that Sydney house prices did nothing for 10 years and negative gearing was there. If it wasn’t, prices might have gone south.

These are extraordinary times

We’re in a special period where the RBA has record low interest rates and can’t easily raise them.

These are extraordinary times that call for economic policies that even I’ve never thought of until this week, but it has appeal.

Peter Switzer is the founder of the Switzer Super Report, a newsletter and website for self-managed super funds.

www.switzersuperreport.com.au