Transcript of Question & Answer Session Property Markets and Financial Stability: What We Know So Far

Right now we have got a discussion leaders so we’ll start with Sean Carmody who is the General Manager of Risk Analytics and Insights at Westpac.

Thanks David, I thought I would just make a few observations from the perspective of a banker in and specifically a risk manager at a bank before I maybe throw a few question out there. I think obviously the fact that we’ve got media here just reinforces how much interest there is in a topic like bank property prices and I certainly know from personal experience that if I’m around a barbeque and people discover that I work for a bank in risk management it’s not too often I’ll get a question about derivative counterparty risk or even commercial property lending risk: it’s always ‘what do you think about house prices?’.

Of course I’m a good risk manager and I leave the forecasting prices to my colleagues in the economic department to think about well what does it mean to the bank, what are the risks that are posed? I think there were very good quotes from Feynman in the speech we just heard, but I’ve taken a quote that I can attribute to the Reserve Bank away for myself to use that a bit at the bank which is ‘credit is not an amorphous blob’ so that’s the one I’ll be using next time when I’m talking about credit risk to the bankers.

But how do we think about the sorts of issues that Luci discussed? Obviously the Reserve Bank is thinking about this from the perspective of the financial system and the primary focus for us in risk at a bank is to think about it from the stability around portfolio. So it’s really not enough to have a view whether or not prices are going to be stable we want to really know what could happen if prices do fall. So if you look at the performance of our portfolio at the moment on the residential mortgage lending side and in fact across the industry, it looks very good, delinquency rates are low, loss rates are very low, it looks wonderful. The question we always have to ask ourselves, if the outlook turned out not to be quite so rosy, house prices did decline and did decline sharply, how much could those losses increase? Because obviously they would be likely to increase and the question is how much.

So one of the most important tools that we use when we think through that is the stress testing, so I thought I’d talk for a few moments about how we approach stress testing of our entire portfolio, but specifically the mortgage portfolio. So essentially what that involves is we start off with a range of scenarios we think through well what could happen, what could go wrong? And that might range from looking at experiences in other markets, look at downturns that for example what happened through the financial crisis in the US, we think through, well what are the risks for Australia if there was a very hard landing in China, impacting quite a bit. We think through all of these scenarios and we also have a pretty standard scenario that we run each year to get a consistent trend through time. We take those narratives and translate that into key indicators, so unemployment, interest rates, growth and of course house prices, what could those things mean. And we work closely with our economics colleagues to understand those transmission mechanisms. And then we try and translate that well what could that mean for default rates, so obviously unemployment increases then borrowers are more likely to find themselves unable to repay loans, but then importantly also even if borrowers to default what does that mean for loss given default and obviously property prices themselves are going to be important determinate of these two. And given the interconnectedness that Dr Ellis is talking about we have to look into correlation effects, and that’s not just correlation of default rates across the portfolio but also correlation between default rates and loss given defaults. So if property prices fall, our expectation is that tends to mean that those borrowers do default potentially is more because obviously their collateral is reduced in value, but also that tends to trigger an increase in the likelihood of default.

So that’s something that we all roll together and try and push through and project what does that mean. And we do that on an annual basis for the whole portfolio to help inform our capital adequacy so resilience for our balance sheet tends to ultimately come down and say how much the capital will grow and we use that to really try and understand whether we‘ve got the capital absorption capacity to look at those losses.

And just to give you an idea of the size of our typical severe recession scenarios, and we publish these for investors on a regular basis as well, is that under these sorts of stress scenarios for our mortgage portfolio we could get anything from 15 to 20 times the loss rate that we experience in a more benign time. So that’s a significant increase, these are big portfolios, but put that into context even when we do that not only is our capital more than enough to absorb that, but we still see through in our stress testing that where we tend to lose the most money is where banks in Australia have always lost the most money: commercial property. So notwithstanding the fact that you know these are big portfolios for the banks, they do prepare to be resilient in the face of these sorts of stress tests.

But another thing I think that’s sort of interesting is to try and understand a link between our own perspective of just looking at our portfolio and the perspective of the system as a whole. Because obviously as a bank they’re lending into the system and so instability in the system can flow back to instability in our own portfolio. And I think one of the interesting things that came up in the discussion is that when you think through financial stability the cause or effect through the lending channel is important but not necessarily the only fact and certainly you can imagine scenarios where property prices could fall and that could have an impact on growth and so on, and to, you know, the loss of wealth and the impact that has on spending power. But you could imagine a scenario like that with some relatively benign loss outcomes with – if the leverage wasn’t too high and so on, but you can still get an effect on the system overall. So when we look at some of the sorts of things that have had a lot of discussion in public forum recently with so-called macroprudential measures that prudential supervisor APRA has been announcing over the last year or so, one of the areas that gets particular focus is investment property, and I think that’s an interesting case in point where you can see potentially a bit of the difference between the internal perspective and the system perspective. So there’s certainly been significant growth in investment property lending across the system, and a higher growth rate in recent times than owner-occupier So when we look at our own internal stress testing and our own loss experience they don’t behave particularly different. Our experience is that partly because typically in Australia the level of gearing of investors tends to be a bit lower than the gearing of owner-occupiers and that’s partly because the norm in our market, there is the requirement to pay lenders mortgage insurance to clear above 80 per cent loan to value ratio, we see a significant number of investors don’t borrow more than 80 per cent whereas a lot of first home borrowers will tend to go higher to the extent that they can.

But we see that they – we don’t see undue concerns around an investment property. When you look at for example from a system point of view, it looks much more on actual target to say well if there are going to be growth controls and benchmark growth target it would be applied to there. And certainly at Westpac and a number of banks there’s been a lot of measures we’ve taken to meet those supervisory expectations, so I think that’s a good example where you know although there is a lot of overlap there’s still reactions you might want to take from a prudential point of view managing this offer for a bank and the system overall may not be always 100 per cent.

So that’s a bit of a perspective from a bank, I thought there’s probably a few questions that I pick out from talk, just a few things I took away as quite interesting, and one is you made a passing observation on the difference between when lending between businesses and with individuals and the difference in bankruptcy and the like and one of the features of the Australian market which isn’t the same in all markets is that although business lending to corporations is a big part of the development phase of the cycle in terms of the ownership of residential properties, unlike for example industrial property or retail strips, it’s essentially entirely in the hands of individuals. Now in some countries around the world there is much more housing stock that’s held within businesses and within corporations, I’d just be interested in having your views whether that difference, in different jurisdictions, could have implications whether positive or negative for the different jurisdictions. So that’s one question.

The other question is I’ve sort of touched on myself in terms of our own loss experience and the loss experience of the banks, through the cycles we tend to have more graduated amplitudes of probably commercial properties are. Now it’s certainly the case that it can be a strong link there when a component of that residential property lending is to development of residential properties themselves, but I’d just be interested to the extent that in the next downturn or in terms of the potential risks to financial stability how do you weigh up the potential risk for commercial property lending losses through doing development versus residential mortgage lending obviously from a system point of view housing cycle so big but in terms of the life cycles tends to be bigger on the commercial property side.

So I had a couple of other ones but I might leave those till post this for now.

Thanks Sean, next might call Chris Gibbs from the School of Economics. Chris recently moved here from Oregon so besides his academic credentials he might have a very personal perspective on the Sydney housing market.

Thank you, so overall I really enjoyed the speech, so I think just trying to get the sort of back to how a macroeconomic purist thinks about these sorts of things and how somebody who went through the US housing bust or thinks about these things after now living here in Australia and I’d say from a macroeconomic perspective one thing that I sort of worried about a little bit with what I was hearing in the speech is that in macroeconomics we have been accused of always fighting the last war and I think policymakers have a little trap into that too is that you know whenever the last crisis was that what’s we’re very, very focussed on, on making sure we don’t let that happen again when ultimately probably the next crisis, probably not going to be in housing it’s going to be in something else because we took our eye off the ball of other macroeconomic events that were happening and that’s certainly criticism of macroeconomics. We were all thinking about preventing the high inflation of the 1970s when all the models were built, talk about these things when the financial crisis rolled around you know we didn’t have a whole lot to say in fact we were digging tool kits come back from the 1930s to try to talk about what was going on because we were fighting a last war. So I think that’s something to keep in mind is from a macroeconomic perspective and from a policymaker perspective of thinking about, you know when it comes to the systemic risk and financial regulations you know we’re putting a lot of focus on housing but maybe it’s other issues.

I’m starting to think about is that there can’t be any dispute about how housing plays you know a special role in the economy and I think Luci gave a number of great examples of how it’s different. But I do think that its role in the GFC particularly I do think is a bit overstated, particularly if you think about what happened in the US it does look like I mean so there was clearly a huge property boom and then a downturn but the financial crisis itself looks more like a classic bank run. And so I’ve always viewed this as a fact is that housing bubble itself was a trigger for then greater turmoil in financial markets, and once you have that turmoil in financial markets there was a role which the central bank has is lender of last resort and providing liquidity to the market when the crisis actually hits. And you can argue that although the Federal Reserve did all sorts of non-standard policies to do this maybe there was more that could be done on the front to prevent the credit crisis from happening in the first place.

And sometimes I think that’s an important thing to keep in mind is that you know it’s not clear that just a downturn in housing is always going to lead to you know massive, massive credit market distress, it takes a special situation for that to happen. So although we can talk about property prices play a huge role I think it’s important to keep that in perspective that every housing downturn we shouldn’t then be worried about financial panic.

I think probably as a US person coming to Sydney thinking about the housing prices here I mean it does seem like housing is a bit overvalued especially coming from the US and living through what I’ve just seen, but I think the speech in particular pointed out a number of good points about why you would actually expect housing to be rather expensive in Sydney and Melbourne in particular and especially when you think about coastal cities in general. So we had some great researchers come through UNSW recently presenting information on the US housing bubble and one thing that really struck me is that if you look at cities in the US there was clear distinction between how housing bubbles evolved in different markets. So if you thought about coastal cities like San Francisco it would be very similar to what you see in Sydney. You saw huge up swings in prices but if you look at the long run trend in prices the long trend in prices was always up and you had movements around that and if you look at markets like that like now in San Francisco prices are almost back to their pre-crisis levels. Where if you look at other cities, cities in the interior of the continent such as Phoenix, Arizona you saw that basically over time, since World War II there was basically no growth in real house prices and then all of a sudden the bubble comes along and real house prices jumps up, the crash happens and real house prices levels out. And so I think that sort of speaks to you if you’re thinking about whether or not you’re in a bubble you do have to sort of think about well where are the house price increases coming, what type of city is it, what type of geographical features are around that are basically going to support crisis after a fall relative to other places. So if land is pretty inelastic and you’re building a city in the middle of the desert where it really doesn’t matter which direction you build that one in, that’s going to have a different effect if there is a property downturn than a city like Sydney where, as Luci pointed out, location is always going to matter. If you buy a house with harbour views the price may go up and down in the long run trend is probably going to be the case it’s going to be going up in the long run because you can’t reproduce that location, you’re on a desert plain it maybe doesn’t matter which part of the desert plain you’re sitting on where your house is, and so if your house price gets a huge boom you might want to, maybe not consume out of that wealth because it might be fleeting.

And so I think the last point I’ll make is which goes along with that, is one of the characteristics of the US housing crisis which was not – hadn’t spoken about today is there actually was a lot of consumption out of the housing bubble into the lead up to the crisis. So many people were refinancing their homes, taking the new found equity that they had in them because of the rising prices and they were consuming out of it, and this happened to a large degree. And so you can imagine that’s going to add, when there is a downturn that’s going to add an extra momentum to that downturn because not only now when the crisis start falling, people have less of an opportunity sell out of the house going to be under water but also they have less of an opportunity to consume out of that housing bubble, that has an extra wealth affect, that’s going to be on top of that, I’m not as familiar here so that would be a question that I would ask you, are we seeing that happen? Are we seeing Australians starting to consume out of that housing bubble because if we are I think that would be more of a signal of you know potentially risky borrowing than just the usual mortgage on the house itself.

Great thanks very much Chris, Luci would you like to reply?

Thanks for those comments and questions and I probably should have taken some notes for the specific questions, but taken in the reverse order. Yes we are seeing quite a bit of refinancing activity but what we’re not seeing is net housing equity withdrawal, so you can work that out I mean you know we did all this 10 years ago those you know graphs of housing equity withdrawal where you look at the injection of equity through construction activity that people are paying for and net that against the amount of debt that people are actually taking on. And in the early 2000s sort of 02/03 Australian households absolutely were withdrawing equity from housing. They have not been doing that since about 06. And I think one of the important narratives we see here is that there was that transition to a new debt level relative to income and then a whole bunch of things change in about 05/06 – incidentally before the crisis – including the rates house price growth, rates of debt growth relative to income, but also the household saving ratio and the relationship sort of debt to construction activity as measured by housing equity withdrawal. So at the moment we’re seeing household inject equity into housing.

So that’s quite interesting but of course there is a lot of refinancing activity particularly in owner-occupier space and now that there’s a lot more prudential group here on the investor space I suspect that we’ll see even more of it as the lenders compete, but at this stage we’re not seeing that as being connected with a big easing in lending standards but you can kind of see the lenders are churning the market trying to you know trying to compete for business. But that’s a very important point.

I absolutely endorse your comments Chris about the geographic aspect of it and in fact there was a paper I wrote with a colleague back in 01 where we talked about the fact that all of the Australian cities are coastal, we’ve got a very concentrated urban population. That has implications for what you should expect the national aggregate priced income or debt to income ratio and I think that past work has stood us in good stead.

I also endorse Sean’s comments about, don’t fight the last war, I think I spend my entire time, particularly outside observers will come in and we talk to a lot of foreign contacts and all they want to hear about is, ‘well your banks lend to housing and that’s scary and your house prices are higher and that’s scary’ and yeah we don’t want people to fight the last war and you’re absolutely right. So I think if you look at the narratives in the Reserve Bank’s Financial Stability Review, we’ve certainly said we’ve been concerned about housing for a while but in particular way, we’ve articulated that in a variety of forums. Whereas actually even though we’re kind of at the bottom of the cycle and come back up on commercial real estate we’re already ringing the bell because we know that’s where things can go bad, and absolutely we are seeing within that commercial property exposures return that Sean’s bank and everyone else’s banks are sending to APRA and on to us, we are actually seeing quite a lot about residential development I mean you only have to drive around Sydney to know that’s true. I was up on the Gold Coast on the weekend and there’s an awful lot of development going on the Gold Coast again where there is a lot of land. So yeah that’s absolutely got our attention and I think it’s important to be clear about the gradation of risk and it’s not just oh my goodness it’s a disaster but everything’s fine, you’ve got to have a sort of a spectrum of concern and so I think we’ve got heightened concerns about both the mortgage market and the development market at the moment which is how we characterise it. You say it’s hard going to a barbeque as a risk manager, you should be … try being the Head of Financial Stability since October 2008, it is the only job title that gets a laugh.

All right Luci you might want to stay up here, time for some questions.

Just in terms of the amount of foreign capital that’s coming into Australian equity, it’s coming into Australia, what sort of effects do you see in that with regards to the property crisis?

Well one thing we do know about foreign demand coming into Australia is that data are not very good, there is work being done to get a better handle on those data, so I wouldn’t want to put a number on it just because we know the quality of the data are not great, but we also know that migration has been very strong in Australia over the last decade and at least some of that demand is really about migration and we also know that a large part of that foreign demand for property is being directed into new builds, so it is actually boosting supply and I think one of the things that we raised in the Financial Stability Review the last couple of issues, certainly in the last year or so, is basically wanting some comfort that what’s being built actually has a secondary market and that it is actually sort of appropriate to the underlying demand in the Australian economy and so that’s a question we’ve raised given that some of that additional supply is quite concentrated in CBDs in particular kinds of apartments, particular sub markets, so that’s certainly something we’ve been looking at.

Yes.

Yes if I can ask a media question, it’s …

: Sure you can ask a media question.

Sue Lannin, Australian Broadcasting Corporation and of course I’m going to ask this question. Do you think there is a bubble in the Australian property market particularly in Sydney?

I have been asked this question before, I have been asked this question in Parliament and the answer I’m going to give you is the answer I gave them, which is that we don’t find it that helpful to have a binary categorisation of bubble, not bubble. We think it’s helpful to think about the spectrum of risk, there’s a gradation of low risk through to high risk. I talked about this actually in a speech at the University of Adelaide last year, and the problem with putting everything in the bubble and not bubble binary categorisation is that it ends up being an argument about whether your model’s right and as economists we all love to argue about models, it’s like my model’s better, no your model’s better. Look, the reality is it becomes an argument about the model and it also becomes an argument about you know then you can’t do anything until it is a bubble, well I don’t think as a policy maker I would be comfortable with that characterisation, because you know by the time you’re absolutely sure it’s a bubble it’s too late. So you want to be responding in a graduated way early on, adding resilience to the system so that you don’t get into trouble and I think the leaning, you know pricking bubbles or leaning into bubbles I just don’t think it’s a helpful way to frame it from a policy perspective and there’s some other quotes from my Adelaide speech last year that can also be used to answer that question.

I was interested in your chart showing the percentage of Australian banks’ balance sheets are exposed to housing compared to the US. I mean given the first thing that happens when there is a downturn, banks start to tighten their credit underwriting, to what extent do you think financial stability in Australia is more vulnerable to the housing cycle than in the US?

Well I think the proof is in the pudding there. I think the issue that the US had and I’ve written about this in the past, firstly as Chris mentioned yeah it’s much easier to get an oversupply of housing in the US because you’ve got these cities in the dessert and so it’s much easier to get a big crash in prices once you’ve got a housing oversupply, that’s actually quite difficult here. Look housing is a bigger fraction of the balance sheets of the Australian banks relative to the US banks, but as I said, credit’s not an amorphous blob and household credit risk is not an amorphous blob. And I think the point I was making just a little bit afterwards in the speech is that essentially the risk profile of the American households both for institutional reasons and decisions about who they would lend to meant that you couldn’t actually treat them as being equal risks, that the risk profile, and also part of the point here is simply that all of the mortgage lending in the US is somewhere else. It’s in institutions without, it’s not all on the balance sheets of the banks, but the banks ended up getting exposed because of their involvement in the securitisation production chain. So this tells you that property is important but it doesn’t tell you which country faces relatively more risk because so many other things are going on.

But I mean, you’re expressing a concern that so many people, foreigners come and they say housing is scary I mean anyone who – it used to be back in the 60s or 70s a famous person would come to Australia and the journalists would rush them in the airport and say ‘so what do you think of Australia?’ Some of you will remember that. Nowadays I feel like someone turns up here and it may not actually be at the airport but the journalists rush to them and say ‘so what do you think about Australian house prices?’ And I think it’s really worth asking well what would you know about Australian house prices? What would you know about relative risk? And I think particularly people coming from the US from the institutional framework that’s there you can’t translate different countries risk profiles to another country without knowing a lot about the institutional framework. And I’m not saying there’s no risk but I’m just saying this graph doesn’t tell you that.

Mariano.

Two questions one is Australia has some recessions in the early 1990s and there’s a question about measuring the business cycle appropriately and the second one is what’s your take on Basel III and is regulation appropriate or is it missing something?

Gosh that’s two very big questions, Mariano. There was a comment made earlier about the relative risks of commercial real estate versus housing and actually Mariano and I and another colleague worked on a paper when Mariano was at the Bank before he came to UNSW, where we actually teased out some of the mechanisms why we think the commercial real estate is on average a higher risk, so I just want to give a plug for that.

But yeah two very big questions. So we haven’t had sort of a proper full blown recession since then. You could argue that 08 was a mini recession if you look at what happened in unemployment, it looked like a shrunk-down version of the kind of recessions that we normally see particularly if you look at the labour market but it was so fleeting that people don’t really count it as one. Yeah it is kind of extraordinary to have gone that long without a full-blown recession I think that’s been a great outcome for this country and its one that other countries have not replicated and so ultimately it will happen and so I guess part of my job is to make sure that actually the nation is resilient to whenever that happens. I mean the analytical point you made does that mean we’re not measuring business cycles right, I mean I think the Australian perspective is certainly one of the reasons why I’ve been a little bit sceptical about that literature that you have people saying ‘well the business cycle is sort of you know five to 10 years and then there’s this longer thing called the financial cycle’ and it’s like well I’m sorry our business cycle kind of looks a bit longer, so you know I struggle to feel comfortable with just sort of defining this bit of the spectrum as being the business cycle and this bit as being the financial cycle and I just wanted to use this speech to kind of put that out there publicly.

So the other very big question which I don’t think I can fully answer today is what I think of Basel III, and I think the amount of regulatory reform that has happened internationally since the crisis is extraordinary. I mean after every crisis there is certainly initiatives to you know prevent it ever happening again and you know certainly on data after the Mexican crisis we had the IMF Special Data Dissemination Standard, after the Asian crisis we had financial soundness indicators, since the GFC we’ve had the data gaps initiative and apparently there’s now going to be data gaps initiative phase 2 so there will always you know those kind of responses. It’s not just Basel III there’s just been such an enormous I mean you would have seen some of it when you were at the Bank just the amount of the whole Basel industrial complex is really – is ongoing. You know first you know Basel III is kind of being done but there’s still work been going on in terms of rethinking the standardised framework, rethinking the relationship between the advanced and the standardised, calibrating the leverage ratio. There’s a whole other work program going on just in the Basel Committee, then you go to the Financial Stability Board and you’ve got,what’s happening with sort of shadow banking, you go to IOSCO and the Committee on Payments and Market Infrastructure and there’s all this work on central counter parties and over the counter derivatives, the 13^th floor is basically almost fully occupied just dealing with all of those things. So it’s very important to Australia that the authorities engage in that fully, and make sure that the outcomes are appropriate to a range of different countries including Australia and not just the countries that had the crisis. But I think what we’re finding is you know people are not going to be just, look, focussing on the last war because when you see the shadow banking well we made banks safer, oh well hang on that means that risk is may be going into other parts so we’ve got to look at shadow banks, and now we’ve got to look at financial market infrastructure. It’s actually never ending.

So that’s a short answer which really just summarises a very long answer.

So earlier you talked about how sort of debt increases with inflation so as you can get more debt, this can lead to an increase in property prices and I get that would have sort of been important in the 1990s when you saw this inflation, but the RBA has done a very good job at keeping inflation like low right now, so do you think the same phenomenon is important and explaining I guess debt and property prices now?

Very good question Nalini. I think yeah if you look at the graph and this is the thing that you know, again, the foreigners coming in and getting stopped by the media at the airport or whatever it is that’s happening, may not be fully familiar with until you put the graphs in front of them. If you actually look at a graph of household debt to income or housing prices to income in Australia there’s a lower level and then there’s this transition up that goes for just shy of a decade, finishes somewhere between 04 and 06 and when you look at saving ratio, prices, debt, at the moment housing prices, particularly in the big cities, are sort of at the top of the range they’ve been cycling around the last decade but it really does look like there was a level then there was a transition then there was another level and there was a range of different, independently complied, data sets that have the same shape, with just very slightly different beginning and end points and that sort of tells us that what Glenn was saying in a speech in 1998 and what we were saying in the early 2000s we didn’t know exactly when it would end and we didn’t know exactly how far it would go, but we got the narrative broadly right and in the end it was all Modigliani 1976 about the mortgage tilt and the consequences of disinflation. Now could we have another ratchet up again of debt well really only if you think that there’s going to be a permanent disinflation from here and I think we haven’t changed our inflation target so that’s kind of not a risk I really want to take with the … People are saying do you think the equilibrium real interest rates has come down?, I said that’s not really a punt I would take with the financial stability of the Australian economy.

Maybe I can ask a question here. So you emphasised the role of commercial property and the importance of that, perhaps more than residential, commercial is a very diverse category think CBD office buildings to warehouses in the suburbs and the economy changes, technology changes, big changes in the commercial property sector for example talking with real estate people in New York who say the big growth over there is warehouses, that’s where the growth is, no one wants to Grade-A Manhattan office buildings they want the new houses for incubator spaces for tech firms as well as usual uses as the US economy picks up is warehouses. So does the RBA have a view on where the risk lies in this very diverse sector? And in Australia with the mining boom it’s the same issue for commercial property there?

Well Kevin I think the important point there is the diversity and I think one of the reasons why there is a bit of a tendency to fight the last war in the international debate is housing’s easy to measure and the data more readily available, so people do these grand correlations between the debt and housing prices and GDP and whatever because you can do that much more readily and over a much longer time periods than you can with commercial real estate and it is complex and it is a whole bunch of different segments and there is a … I do sometimes feel it’s not just fighting the last war it’s also looking for your keys where the light under the lamp post where the light is better because it is easy to wrap your arms around the housing market whereas, you’re absolutely right, there are these sort of more subtle issues and it’s very hard to get your handle on it and that’s why we buy data from some of the industry providers, some of whom are in the room, so yeah we think it’s really important to keep watching that and understanding that and you’ve got to put appropriate weight on both of them, it’s not one/zero either/ or; it’s you’ve got to look at both.

And there’s one last question from Sue.

Yes do you think there is a risk of a recession in Australia given the Chinese share market turmoil and the slowing Chinese economy?

Yeah look I think focusing on sort of the short run probably isn’t that practical at this point, I mean the Australian economy is running below trend. I don’t think I can improve on the forecast that my colleagues have put out in the Statement on Monetary Policy on that, it’s obviously the outturn in the Chinese economy is very important to Australia and that’s primarily a macroeconomic channel of connection. But as I said to Mariano, we’ve been what is it 23 years without a recession. One will happen in my lifetime but I really don’t want to put money on exactly when, but I don’t put a lot of score in the idea that it will happen imminently.

Thanks Luci and if I understood your speech correctly and I’ll have to read your notes to make sure I understood this, a way to avoid recession generated by a property market is to keep making sacrifices on the altar of the property market gods is that right? So there is something we can all take away today and I’m sure that will be the headlines later today about what the RBA recommends, so please join me in thanking Luci and Sean and Chris.