Lifting rates will not stem rising market in Australia

# Terry Ryder
# From: The Australian

SOMEWHERE amid the fuzzy logic that drives the Reserve Bank's interest rate policy is the notion we have a housing price bubble and that raising interest rates will deflate it.

Glenn Stevens and his cohorts are wrong on both points. There is no bubble and history shows that lifting rates does little to quell a rising market.

Of course, it's difficult to know what Stevens and his faceless friends on the RBA board are thinking. They meet, decide to increase the cost of our mortgages, issue a press release and then disappear into the city.

Stevens should be compelled to face a press conference after each decision and justify the increasing pain he is inflicting on families and businesses. The economy is recovering, no doubt, but it has not yet recovered. Many businesses are still doing it tough, especially retailers.

The RBA appears to be reacting to extremes: the massive numbers that express future export deals by resources companies and activity at the top end of the housing market, all of it magnified by the tabloid media.

It is overlooking the mainstream where most action happens: ordinary businesses that employ of the bulk of the workforce and the everyday property market where 95 per cent of deals happen. Neither of these spheres is going ballistic.

I haven't seen anyone define what the term housing bubble means, but I assume it describes a market inflating out of control with prices increasing in an extraordinary way. I'm convinced most journalists and commentators wouldn't have a clue what it means and don't care whether it's true or not.

James Packer spends $12 million buying houses next to his Vaucluse mansion so he can build a swimming pool and this is presented as evidence the market is out of control. A small number of Chinese investors buy at the top of the Sydney market and they're blamed for pushing prices beyond the reach of families.

We do not have prices rising exceptionally in the mainstream market. According to the usual research suspects, house prices across the nation rose an average of 11 or 12 per cent in the past year. This is being represented as extraordinary, when it is merely average based on the standards of the past decade.

We saw much larger price rises in the 2003-2004 up-cycle and again more recently.

In 2007, the houses price indexes from the Australian Bureau of Statistics showed prices rose 12.5 per cent in our capital cities, including 14 per cent in Canberra, 18 per cent in Melbourne, 20 per cent in Adelaide and 22 per cent in Brisbane.

Why, suddenly, is a rising real estate market a problem?

Why is Stevens so concerned about a recovering property market? And where did he get the idea that lifting interest rates will scuttle it? There's no evidence that lifting interest rates correlates with a fall in dwelling prices.

We started in 2007 with the official interest rate at 6.25 per cent, compared with 4.25 per cent today. In the next six months rates increased from 6.25 per cent to 7.25 per cent.

But dwelling prices kept rising. Indeed, the rate of price growth throughout 2007 and into the first half of 2008 kept accelerating. The more the RBA lifted rates, the faster the rate of price growth. It was only the onset of the global financial crisis that finally slowed the market.

Over the 18 months from the start of 2007 to the middle of 2008 Darwin's median price rose 15 per cent, Canberra's by 18 per cent and Adelaide's by 23 per cent.

The evidence goes back well beyond the past decade. In my research I found a Residex article written in 2000 which began with: "Do rising interest rates mean decreasing property prices? If history is any guide, not at all. In fact, analysis of our data reveals that interest rates have no effect on the capital growth of property at all."

The article presented data on periods of rising interest rates in the 70s and 80s which "were followed by accelerating or steady house price inflation".

My three decades of researching real estate tell me price trends correlate more with the level of public confidence than the level of interest rates. If anything, rising interest rates have a positive impact on confidence, because they are a sign of an improving economy.

Prices stopped rising in late 2008 because confidence fell as we faced a battering of negative news about the GFC, the impending Australian recession (which never arrived) and the prospect of high unemployment (which didn't happen either).

Confidence, and price growth, revived in the latter part of last year as the emphasis switched to news of recovery, falling rates of unemployment and a resurgent resources sector.