While most other mainstream commentators continue to heap praise on RBA Governor, Glenn Stevens, as he prepares to exist his post, ABC’s economics editor, Ian Verrender, has done what virtually all his compatriots won’t: question Steven’s housing bubble legacy bestowed on younger Australians:
There’s no doubt Stevens played a deft hand at the height of the financial crisis, steering the economy clear of trouble, after a stellar performance in keeping inflation in check during the mining boom.
But his strategy since 2012 of deliberately firing up an already dangerously inflated east coast housing bubble to soften the blow from the unwinding of the mining boom, has placed the banking system and the economy in harm’s way.
In the process, the future wealth of generations of young Australians now will be determined by whether they inherit real estate from their parents. Saving to buy into the great Australian dream will be the exception rather than the rule.
Until last year, Stevens refused point blank to curtail housing lending, arguing macro-prudential policies were ineffective. While his position has now changed, many argue it was too little, too late.
Unfortunately, it most likely will be the housing bubble, rather than the financial crisis, that will define Glenn Stevens’ legacy.
Well done Mr Verrender for calling a spade a spade.
During Steven’s tenure, the RBA’s speeches and commentary around housing have often felt like they have come directly out of a bank’s economics/marketing department, aimed squarely at appeasing foreign bond investors and boosting confidence, rather than telling it as it is.
For years we heard from the RBA that: Australian housing is not particularly overvalued; the banks’ lending standards are sound, financial regulation is the best in the world, and macro-prudential policies are not required (despite the shift globally to such rules and the RBA’s own research showing they work); the banks’ massive external liabilities do not pose a problem and might even be desirable; and the potential headwinds facing the economy are mild.
Sure, the RBA and APRA have recently backtracked somewhat on macro-prudential, implementing a timid 10% ‘speed limit’ on investor mortgage growth last year. But this came long after the horse had already bolted and is way too generous given the circa 2% growth in nominal GDP.
Now compare the RBA’s approach with the RBNZ, which has implemented macro-prudential controls on high risk mortgage lending, consistently warned that New Zealand housing is significantly overvalued and that the banks’ high level of external liabilities poses a risk to financial stability, and has openly pressured the various levels of government to get their act together on housing policy, forcing them into action.
Don’t get me wrong. I don’t hold the RBA fully responsible for what has transpired in Australian housing markets. The fact is, politicians at all levels have abandoned clear-thinking economics to manage the market failure around housing, from state/local government urban containment, to federal government maintaining demand-pumping tax lurks (e.g. negative gearing and the CGT discount) and at at various times first home vendor grants. Nevertheless, by refusing to speak-out, the RBA has effectively given Australia’s politicians a free pass on housing.
Put simply, the RBNZ has been proactive on housing risks, whereas the RBA has been entirely reactive.
One of the few times that Captain Glenn did speak openly was in June 2010 when he issued the following warning about Australia’s then record high household debt:
Reserve Bank governor Glenn Stevens is urging Australians to reduce household debt and increase savings, while the economy remains strong and the risk of financial hardships are low.
In a speech given in Sydney, Mr Stevens said the European sovereign debt crisis carried a lesson for Australians that “potential vulnerabilities need to be addressed in good times, even when markets are not signalling unease”.
“One would have to think that, however well households have coped with the events of recent years, further big increases in indebtedness could increase their vulnerability to shocks – such as a fall in income – to a greater extent than would be prudent.”
Six years later we have or have recently had the following:
- Record high housing valuations;
- Record high household debt;
- Record high investor participation;
- Deteriorating lending standards; and
- A budding apartment and oversupply.
History should (but probably won’t) assess Glenn Stevens’ tenure as a failure. He let the dumbest bubble in history inflate to another all-time high just as national income is falling and the economy is facing its biggest structural adjustment since the early-1990s recession.
