Why the RBA needs to consider a

So it turns out the crazy, multi-week debate we had last year on the accuracy of Australia's house price data was—as we argued—a furphy designed to rationalise, or distract attention from, the otherwise irrational rate cuts bequeathed on borrowers in May and August that simply blew a bigger bubble.

On Tuesday the Australian Bureau of Statistics reported that house price growth across the eight capital cities surged 4 per cent in the final quarter of 2016 with calendar year appreciation running at 7.7 per cent, some 4 times faster than wages growth and 5 times Australia's core inflation rate.

As expected the ABS's quarterly index results have started converging back in-line with the 10 per cent dwelling price inflation recorded by the daily hedonic CoreLogic index (after adjusting for an upward revision due to a sample enhancement in April).

The 2016 house price growth is especially sprightly considering home values had already leapt 28 per cent between January 2013 and December 2015 (according to both the ABS and CoreLogic).

Over the 12 months to September 2016 the ABS's index implied house prices were inflating at a benign 4.1 per cent clip compared to CoreLogic's friskier 7.1 per cent (netting out the revision).

Yet as Goldman Sachs highlighted this week, the December jump in the ABS numbers to around 8 per cent annualised is "consistent with our preferred measure of house prices from CoreLogic [with] the higher frequency data from the latter suggest[ing] house prices have continued to reaccelerate into 2017".

CBA's economists concurred, commenting "today's [ABS] data shows that both measures are headed higher, just at slightly different rates".

"We expect to see continued national dwelling price growth until there are some changes to the policy settings driving the spectrum of demand factors," CBA said.

NAB likewise characterised the ABS's findings, which have "a nearly three month lag behind CoreLogic's", as "consistent with CoreLogic's in showing there was a very strong pick-up in Sydney and Melbourne house price growth rates towards the back end of last year".

Of course it no longer suits our cherry-picking central bank to focus on the more precise CoreLogic numbers—as it did for years—in descriptions of housing conditions.

(Disclaimer: I co-founded a business that developed the hedonic index intellectual property.)

The once market-orientated RBA now hopes that the bubble blown by its cheap money policies can be cauterised by getting the Australian Prudential Regulation Authority to re-regulate lending via "macroprudential" constraints on credit creation.

Setting aside the fact that the RBA years ago warned that such controls may be ineffective when interest rates are too low, they also have no impact on non-bank lenders that are not regulated by APRA (after the Banksia scandal in 2012 I argued they should be, but Sleepy Hollow was not listening).

In 2017 droves of banks and non-banks have sourced billions of dollars of capital by selling bundles of home loans to investors prepared to hold them to maturity.

Pepper, Liberty, and LaTrobe have all closed big securitisation sales, as have Bank of Queensland, Suncorp and Bendigo & Adelaide Bank.

This is why the RBA needs to consider a prudent "financial stability" hike, which money markets will impose on all banks and non-banks through the yield curve, before too long.

The duration lovers' logic that the RBA cannot normalise rates back to their neutral level at least 100 per cent above current marks because of excessive household debt is like a doctor telling a drug addict to keep dosing because sobriety is too painful.

Here it's germane to cite some excellent new research by CBA's Jarrod Kerr, who managed to track-down a time-series of Australian home loan and savings rates going back to 1804 in a long-forgotten RBA paper dated 1971. (The RBA lost this work, which Kerr found buried in the bowels of the NSW State Library.)

The data illustrates that even though Australia's economy is expanding at a normal pace, long-term interest rates—as represented by government bond yields—have of late been lower than any time over the last 200 years.

A similar observation applies to home loan rates, which are among the cheapest seen in centuries.

So although inflation is below the RBA's official target, the unprecedented distortions its policies have induced into the price of money are perpetuating deleterious consequences elsewhere.

Credit gets expensive

I am often asked what happens next in financial markets. Uncertainty is unusually acute right now, which is why my portfolios are loaded up to the gills with safe cash.

The only other assets I like with any "credit beta" are highly liquid and secure senior-ranking bonds issued by the major banks, which are insulated from a rating downgrade if Standard & Poor's lifts Australia's economic risk score (only an unlikely sovereign downgrade will nudge them to A+).

If you can invest in them, I also don't mind major bank hybrids that offer "spreads" above the cash rate 150 basis points above their post-crisis "tights" in mid 2014.

Most other non-government bonds have rallied in price such that their spreads have compressed back to, or through, those expensive 2014 levels, which for mine is a technical profit-taking signal.

The author is a portfolio manager/director of Coolabah Capital Investments and Smarter Money Investments, which invest in fixed-income securities.