On June 4th Curt McDonald gave a brief presentation to the Western Endeavour Rotary Club entitled, "The Banking Royal Commission, The Housing Crisis and Related Issues.
After a few remarks on his background and what economists actually do, Curt took everyone on a flying tour of these important economic developments and their implications for the future, particularly in light of the recent election results.
Curt suggested that while most of the recommendations handed down by the Commissioner were unlikely to be implemented, the big banks had actually been changing how they operated since the beginning of the Royal Commission almost two years ago. In particular, it is now harder to get a loan than ever before, as bank lending standards have been tightened considerably.
The pull back in lending by the banks has been a catalyst for falling house price over the last 24 months. These declines have been aggravated by the same factor that led house prices to their recent peak: namely, that our view of where house prices will go over the next year depends almost completely on what happened to house prices last year. This recent history is much more important than interest rates, immigration or any other factor in driving house prices.
The RBA has done all it can to prop up households by lowering interest rates, but it is pretty much out of ammo on this front. All it can do now is help influence the AUD lower, which should help exporters. 60 cents seems a good target for the AUD over the next few years, and quite possibly lower if things do not improve. Government is also helping by spending big on infrastructure projects
It is difficult to say how much farther house prices will fall. Property spruikers think we have already seen the bottom. However, Paul Krugman, a famous US economist once said "Housing bubble do not burst - they gradually deflate." RBA research suggests that house prices have further to fall, and we may only be about half way there.
Curt's final recommendation is that we should all see the movie "The Big Short" again.
For a more in-depth discussion of Curt's presentation please visit the Articles section of our website.