An item from Monday’s Australian Financial Review: Houses overvalued by up to 30 per cent, says ex-RBAofficial

Jeremy Lawson, global chief economist of Standard Life (a British fund manager with $460 billion in assets under management) and previously a senior economist at the Reserve Bank of Australia and the OECD:

  • Criticised fiscal policy settings
  • Suggested the RBA’s organisational culture was insular
  • Said there was a bias towards big banks in the financial system inquiry panel
  • Argued low interest rates are pushing house prices out-of-line with fundamentals

Said it is “reasonable to assume that future house prices will grow in line with real household disposable income as the commodity boom unwinds… (but) That would imply overvaluation of between 20 per cent and 30 per cent” (based on a new valuation model released by the Reserve Bank in July):

  • Said valuation distortions have been fuelled by easy monetary policy and regulators’ reluctance to use so-called macroprudential tools to slow price growth:
  • “Overall financial conditions have probably been too loose and that has undermined longer-run financial stability”
  • “Part of the problem is that rates are being relied on to do too much work. Given the risks, I would like to see the RBA and APRA make much more active use of macro-prudential instruments. That way you can have both low rates to support the overall economy while maintaining tighter credit conditions for riskier sectors.”

Lawson said it was dangerous for the Reserve Bank to focus too much on the credit growth rate rather than the amount of credit. Housing credit growth is more than twice wages growth and has pushed the household debt-to-income ratio to over 150 per cent, just below pre-crisis heights… “A high debt-to-income ratio leaves households much more vulnerable to income and interest rate shocks”

Lawson says his biggest fear for the economy is a sharp slow-down in Chinese growth.

More at the link (above)