Australia Rate Policy Risks Home Bubble

August 6, 2013, 6:33 AM

Australia Policy Risks Home Bubble

By James Glynn

Australia’s interest rate cut Tuesday is an attempt to boost a sagging economy. But it comes with a risk: boosting already high home prices. The country avoided the kind of housing crash that consumed the U.S. after 2008. But a period of easy money–Tuesday’s cut to a record 2.5% low was the eighth since November 2011–has some observers worried. Loose monetary policy has failed to lift consumer spending, as Australia exits a decade-long commodities boom.The main beneficiary has been home prices, which rose 2.4% in the second quarter from the first quarter or 5.1% from a year earlier, their fastest pace of acceleration since 2010. House prices have risen steadily since May last year, making Sydney one of the world’s most expensive cities.

Some analysts say the bubble risks destabilizing an economy already dealing with slowing economic growth and rising unemployment.

“When trends in Australian house prices are compared globally, the signs look worrying,” Tony Hughes, managing director of credit analytics at Moody’s Analytics, said in a report. “House prices have increased for longer and faster than in many of the markets where prices cratered during the Great Recession.”

Paul Bloxham, a former senior manager at the Reserve Bank of Australia and now chief economist at HSBC in Australia, said the central bank isn’t yet worried about house prices but this could change. “This could be a worry, but it is not a worry yet,” Mr. Bloxham said.

Tom Kennedy, an Australian-based economist at J.P. Morgan, said house prices for now remain under control but could become worrisome if low rates spur other areas of the economy.

Fueled by easy credit, Australian house prices doubled from the late 1990s to 2003. In 2010, the bank raised rates amid concerns about spiraling house prices.

Local banks, for the most part, play down the risks posed by another house price surge, pointing out that rising real wages have made homes more affordable and allowed mortgage holders to pay off debts at a faster pace.

Still, many observers remain cautious. With unemployment expected to rise above 6% this year, defaults could be on the horizon.

About bambooinnovator
Kee Koon Boon (“KB”) is the co-founder and director of HERO Investment Management which provides specialized fund management and investment advisory services to the ARCHEA Asia HERO Innovators Fund (, the only Asian SMID-cap tech-focused fund in the industry. KB is an internationally featured investor rooted in the principles of value investing for over a decade as a fund manager and analyst in the Asian capital markets who started his career at a boutique hedge fund in Singapore where he was with the firm since 2002 and was also part of the core investment committee in significantly outperforming the index in the 10-year-plus-old flagship Asian fund. He was also the portfolio manager for Asia-Pacific equities at Korea’s largest mutual fund company. Prior to setting up the H.E.R.O. Innovators Fund, KB was the Chief Investment Officer & CEO of a Singapore Registered Fund Management Company (RFMC) where he is responsible for listed Asian equity investments. KB had taught accounting at the Singapore Management University (SMU) as a faculty member and also pioneered the 15-week course on Accounting Fraud in Asia as an official module at SMU. KB remains grateful and honored to be invited by Singapore’s financial regulator Monetary Authority of Singapore (MAS) to present to their top management team about implementing a world’s first fact-based forward-looking fraud detection framework to bring about benefits for the capital markets in Singapore and for the public and investment community. KB also served the community in sharing his insights in writing articles about value investing and corporate governance in the media that include Business Times, Straits Times, Jakarta Post, Manual of Ideas, Investopedia, TedXWallStreet. He had also presented in top investment, banking and finance conferences in America, Italy, Sydney, Cape Town, HK, China. He has trained CEOs, entrepreneurs, CFOs, management executives in business strategy & business model innovation in Singapore, HK and China.

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