Some apartment property developers will have almost wept when they heard Reserve Bank governor Glenn Stevens appearing on television warning investors and home owners about long term residential property values.
Because, to the developers, what it signalled was that the Reserve Bank governor appeared uncharacteristically out of touch with the ‘real’ problem – the shortage of supply. In Melbourne there are an incredible 19 planning authority approved apartment projects currently before the bankers.
Some of them will have fundamental flaws, but the vast majority would have been normally enthusiastically supported by banks. However, in 2010 only a fraction of the projects will gain bank backing. A few might be picked up by overseas non-bank lenders and the rest will be mothballed.
In Sydney, the situation – if anything – is worse with a large number of projects being put before the banks with a similar rejection rate. Brisbane and other capitals have similar problems.
The supply of apartments is being dramatically squeezed by the banks, which is putting up apartment prices which in turn makes the banks even more nervous about lending.
In the eyes of the developers, the Reserve Bank solution to the problem is to warn of dangers to apartment buyers via day time television and then lift interest rates further.
This will make it even harder to get the supply going and the consequent shortages might even force the Reserve Bank to lift interest rates higher than is sensible.
I am a Glenn Stevens fan, but the Reserve Bank governor is facing a problem that none of his predecessors have come up against before – the answer is not in the Reserve Bank “how to” manual.
One year ago, governments and local councils were stopping new development. That log jam is now being cleared, particularly in NSW where it was worst. Now the problem is the banks. What Stevens has to do is work out a way to fund the creation of additional supply both of apartments and outer suburban land so as to reduce shortages and cool the market. It is not an easy task because he does not want to encourage imprudent lending. Some of the problem is related to the capital that banks are required to put behind these loans. Nevertheless, when it comes to commercial lending, the banks are very risk averse at the moment.
In many cases they believe they are already too exposed.
Outgoing BHP chairman Don Argus gave the banks a mild kick by saying that they were concentrating too much on houses and not enough on business. And he was right.
It is not easy for Glenn Stevens to change the game. But jawboning buyers at a time of shortage via television is of limited use. What’s required is jawboning bank CEO’s to try and work out how we get funds to residential developments so as to get the pipeline moving.
Australia’s recovery from the global financial crisis was achieved via a number of forces, including the fact that our banks did not make imprudent loans. It was also helped by the government programs plus the fact that the China markets held up and we had a huge demand in housing driven by the first home buyers grant and the increase in population.
The Australian government stimulus is being wound down and China is tightening its bank lending. We will need the thrust of population growth and housing development to maintain momentum. Starving builders and developers of money is a dangerous strategy at this time.
What we will end up with is an asset bubble created by the shortage which, in turn, leads the Reserve Bank to raising interest rates further than it should. Some state governments know that they still need to free the development approval process. But that will not work unless the banking system comes to the party.
This article first appeared on Business Spectator.
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