Stevens on macroprudential, housing supply

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ScreenHunter_02 Mar. 26 15.58

By Leith van Onselen

The transcript of yesterday’s Q&A session with RBA Governor, Glenn Stevens, at the Econometric Society Australasian Meeting and the Australian Conference of Economists has been released, and sees Stevens seemingly abandoning Luci Ellis’ stick figures approach to prudential regulation and tentatively supporting macro-prudential controls on mortgage lending:

ScreenHunter_3146 Jul. 04 08.42

Good stuff – even if it did include the usual buck-passing from the RBA – which has responsibility for “financial stability” – to APRA – the prudential regulator. Let’s hope the Council of Financial Regulators, which comprises the RBA, APRA, Treasury and ASIC, can come to some consensus on this issue.

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Stevens also slammed Australia’s housing supply-side constipation, arguing that we have effectively ‘shot ourselves in the foot’ by engineering expensive land/housing, and in the process given away what should be one of the nation’s fundamental competitive advantages – inexpensive shelter and low cost land:

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Again, good comments by Captain Glenn; although I would like to advise him that tight supply is also a financial stability issue, since it tends to increase price volatility and make the housing market more prone to boom/bust cycles.

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On that we can turn to Business Spectator’s Callam Pickering this morning, who attacks Glenn Stevens statement yesterday that “the amount of new borrowing does not appear, overall, to be imprudent” when assessing the property rebound:

callam_housing_july42

Unfortunately the governor’s assessment is nonsense and the graph above is a terrible way to measure lending activity. Effectively he is arguing that lending activity is not a concern because outstanding credit is huge. To the contrary: that is the very reason why mortgage lending is a concern.

Furthermore, the graph completely ignores the broader economic climate. Earlier episodes of elevated lending occurred during strong periods of economic growth, with rising participation and elevated income growth. By comparison, this recent episode occurs against the backdrop of what is likely to become the weakest economy in at least two decades.

These are all points MB has been making for a year or so now. Most importantly, when house price to income ratios leaped in the lead up to 2003 to levels that they are returning to now, Australia was on the verge of a 150 terms-of-trade boom. Bizarrely, the RBA called it a bubble then and moved to pop it. Now, as economic fundamentals go completely the other way, it argues that the same ratios are “not imprudent” (notwithstanding some specific warnings) and let it run.

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It’s imprudent all right and has been all along.

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About the author
Leith van Onselen is Chief Economist at the MB Fund and MB Super. He is also a co-founder of MacroBusiness. Leith has previously worked at the Australian Treasury, Victorian Treasury and Goldman Sachs.