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Alliance Bernstein senior economist Guy Bruten noted that the developing imbalances in commercial property, particularly in central business district office space, were given significant coverage in the RBA’s review, released last week.
“As in the residential sector, some of this is being driven by the reach for yield by investors, facilitated in part by more aggressive pricing and lending conditions from Chinese and Japanese lenders aiming to increase market share,” Mr Bruten said.
“And it is also occurring against a backdrop of deteriorating fundamentals. Demand has fallen away in Brisbane and Perth, as the resources boom has turned to bust. And there’s a significant amount of new supply to come on line in the next couple of years."
While these issues illustrate the difficulty of generating future economic growth without the mining sector, volatility in financial markets is picking up, increasing the likelihood of macroprudential policy measures, Mr Bruten said.
“The RBA, in cooperation with other regulators, is moving towards doing something more concrete on this front,” he said, “but what and how they do it, as well as the measures’ ultimate effectiveness, remain open questions. And in the meantime, investors are becoming increasingly anchored to the low-rate/low-volatility environment.”
This is the dilemma highlighted by the Bank for International Settlements (BIS) in its most recent quarterly review, Mr Bruten said.
“What path should central banks follow to resolve this dilemma?" he asked. "Well, as the old joke goes, ‘I wouldn’t start from here'."