Most embarrassingly for the RBA, two of its top researchers, Trent Saunders and Peter Tulip, published a detailed academic paper shortly thereafter proving that almost all of the stunning increase in house prices between 2013 and 2017 was indeed attributable to the reduction in mortgage rates.

For the avoidance of doubt, the RBA economists demonstrated that housing supply and population growth had comparatively little influence.

The RBA is masterful at spinning stories (so-called “narratives”), and the truth is that they are often fairy-tales. Or, in the case of Lowe’s claim monetary policy did not blow the mother of all housing bubbles, just pure BS. (Journos reliant on the RBA drip are reluctant to call this out.)

Currency market premia wrt to US dollar market. Supplied

So forgive me if when Lowe says the recent RBA rate cuts will not reignite the housing bubble, my mental reflex is to dismiss this rhetoric as non-credible.

What I know with certainty is that the RBA’s own research finds that a permanent 1 per cent reduction in real mortgage rates will lift house prices by a stunning 28 per cent.

Our forecasting position is clear. We predicted the end of the housing boom in April 2017 (prices started falling a few months later) and a total 10 per cent peak-to-trough correction. We got almost exactly that: CoreLogic’s five capital city index fell 10.7 per cent.

In April 2019, while prices were still declining, we called the end of the correction and forecast a 5 per cent to 10 per cent increase in national prices in the 12 months following the RBA’s second cut. Sydney and Melbourne prices stopped falling in May and started rising again in June.


I expect that CoreLogic will shortly report that in July its five capital city home value index rose for the first time since September 2017. We estimate Sydney and Melbourne prices have jumped a solid 0.5 per cent off their 2019 lows.

This recovery will accelerate as cheaper mortgage rates grip and the banking regulator’s easier interest rate serviceability tests expand purchasing power further. (It is a source of endless amusement that perma-housing-bears like Steve Keen and John Adams consistently get the housing cycle totally wrong, as highlighted in my recent debate with the latter.)

I would not be surprised if the housing market starts to boom again and the capital gains over the next 12 months are closer to the upper end of our proposed range.

From a credit quality perspective, this is good news for Aussie banks. We are forecasting a gradual decline in mortgage arrears and an increase in prepayment speeds. After climbing between 2014 and 2018, our compositionally adjusted (hedonic) index of Australian mortgage arrears has flat-lined more recently.

In a world of expensive assets, bonds issued by Aussie banks continue to look cheap and are still trading at many multiples their 2007 levels in credit spread terms.

I’ve long had a hypothesis that because of the enormous bias in super fund portfolios to equities and the comparatively tiny allocations to cash/fixed-income, the outright credit spreads available on bonds issued in Australia are attractive by global standards (before accounting for hedging costs and the cross-currency-basis).

Pension asset allocation weight vs currency market premia. Supplied


To test this thesis my quants took 3000 senior-ranking, investment-grade bonds issued by banks in Aussie dollars, Canadian dollars, Swiss francs, euros, sterling, Japanese yen, and US dollars between 2015 and today.

Employing a multi-factor regression model, they quantified the time-series differentials in the outright credit risk premium paid above the local floating-rate benchmark after controlling for the bonds’ features, including their rating, maturity, issuer and other variables.

The findings were clear and consistent: outright credit spreads in Australia are indeed much wider than you find for virtually identical bonds in other currencies (before hedging back into Aussie dollars). Whereas Australia was the cheapest bond market on this basis, Japan and the Eurozone tended to have the most expensive spreads.

We then took OECD data on each pension system’s exposure to bonds, and found a statistically significant (negative) relationship between the credit spreads issuers pay and the pension system’s fixed-income weight across time and markets. That is, the more (less) you allocate to bonds, the lower (higher) the credit spreads on these securities.

The author is a portfolio manager with Coolabah Capital Investments, which invests in fixed-income securities including those discussed by this column. This column provides general information only and is not intended to provide financial advice.