RBA calls it: Australia’s housing market has gone horribly wrong.

“Unbalanced” and “out of proportion” are the words they use in a brand new report out today.

“Recent housing price growth seems to have encouraged further investor activity. As a result, the composition of housing and mortgage markets is becoming unbalanced, with new lending to investors being out of proportion to rental housing’s share of the housing stock. “

Do not get the impression the RBA thinks this will be a minor:

“In the first instance, the risks associated with this lending behaviour are likely to be macroeconomic in nature rather than direct risks to the stability of financial institutions.”

nb. “In the first instance…”

Who knows what sort of calamity could follow a macroeconomic event associated with a big house price fall? And if you think not owning a house makes you safe then you are wrong.

“…a broader risk remains that additional speculative demand can amplify the property price cycle and increase the potential for prices to fall later, with associated effects on household wealth and spending. These dynamics can affect households more widely than just those that are currently taking out loans: the households most affected by the declines in wealth need not necessarily be those that contributed to heightened activity”

This chart got the RBA concerned:

 

house price expectations

“… expectations of future housing prices seem to be influenced by the recent past (Graph  3.4). This tendency was stronger than average in New South Wales and Victoria at the end of last year. The risks associated with this behaviour are likely to be macroeconomic in nature if households were to react to declines in their wealth and any repayment difficulties by cutting back their spending. “

The recent rise in interest-only loans (yellow line below) also has the RBA worried about whether speculation is rife.

Interest only loans

They are so worried about house prices they are cracking open the weapons safe and rustling around for some ammo to try to scare off packs of hungry investors.

“The Bank is discussing with APRA, and other members of the Council of Financial Regulators, additional steps that might be taken to reinforce sound lending practices, particularly for lending to investors. “

The most likely step is not to mimic NZ and try to control Loan-to-Value ratios (as you can see in the above graph, LVRs seem to be under control). It is to make banks add a bigger buffer to their lending criteria. Currently they add 2 per cent to the existing interest rate. That might rise.

The last warning the RBA delivers may be important for anyone considering buying a small apartment in central Melbourne:

“A speculative upswing in demand can also be damaging if it brings forth an increase in construction on a scale that leads to a future overhang of supply. This risk is more likely to arise in particular local markets than at the national level.”

CAVEAT: The RBA points out that housing market dynamics are most skewed in Melbourne and Sydney. I’ve noted myself that buying in Brisbane looks like a pretty clever move.

FULL DISCLOSURE: The author is not invested in property.

How long until Tasmania is totally empty?

You can buy a fully renovated mansion on top of a hill in Tasmania for under $850,000.

Tasmanian MansionDid I mention that it is a mansion?

Hobart House plansIt’s also in the heart of Tasmania’s capital city, 1.4 km from the waterfront.

Even though a similar property in Melbourne would cost probably seven times as much, a multi-million dollar saving is apparently not enough to actually tempt people to live in Hobart.

Demographic data out today show the Apple Isle circling the plug hole. Its population growth rate is not far from zero, and people continue to leave in large numbers.

Tassie interstate migration

In the 36 years since 1981, Tasmania has managed to actually lose people to interstate migration, despite the Australian population more than doubling. They’ve been saved from extinction by overseas migration and the birth rate. But will that continue?

The entire state has managed just 700 babies in the last six months, an amazing new low.

Tassie births

The Tasmanian fecundity shortfall looks especially stark when you compare it to other states. WA has had 9800 babies in the last six months.

Screen Shot 2014-06-19 at 12.37.09 pm

The reason for Tassie’s child shortfall is not unguessable: Too few mums and dads, and too many grandmas and grandpas.

Tasmania by ageHow does Tasmania break out of this cycle? If mainland house price growth continues, there should eventually be push factors. Once the price of new housing in country Victoria and outer Melbourne starts to be much higher than the price of new housing in Tasmania, people might start moving there.

Also if climate change picks up, Tasmania will offer the last temperate zone in Australia.

But that doesn’t offer much to Tasmania in terms of positive actions it can take. Another option I’ve canvassed is learning from the failure of the EU, and giving Tasmania its own monetary policy and currency (The Boonie).

Essentially, the lesson of migration everywhere is that most people (except retirees) will move for jobs. That’s something Tasmania has too little of.

Unemployment by state

How to fix? There are glimmers of hope in the data above. Australia’s next big boom will be looking after the aged. If Tasmania can turn itself into Australia’s Florida (the place to move when you retire), there should be lots of jobs in aged care.

It just needs to convince the mainland-dwelling elderly that if they don’t want to work all the way to Tony Abbott’s new pension age, they should downsize to a much cheaper house on the other side of Bass Strait.

That would bring an influx of wealth to the island, and provide for a lot of jobs. The aged care industry is already showing a lot of growth.

Aged care

Can the Apple Isle fill those creaky old Hobart mansions with happy retirees? The key to Florida’s success has been “Weather, effective marketing, low taxes and a herd mentality.” Tasmania can match two of those already (good marketing and a retiree flow). Lower stamp duty for over-55s buying a new property might be a good policy move.

As for the weather? It can’t do much more than it’s doing already, by logging those virgin forests and exacerbating climate change.