It seems you can change the person at the top, but you cannot change the institution.
Late last week, new RBA governor, Phil Lowe, fronted the House of Representatives Standing Committee on Economics where he was asked a series of questions on housing affordability and housing policy, which he largely ducked. Here is the key exchange:
Mr BANDT: If I could just ask about housing: house price growth is routinely outstripping wages growth, and house price growth seems to have decoupled itself from general inflation quite some time ago and is rising faster than general inflation. But in your opening statement you did not seem to express concern about that. It was one of those factors that the RBA is watching but not something that you seem to be concerned about. Is that accurate?
Dr Lowe: There are two elements to this. There is the current cyclical conjuncture and then the longer-term one. The current cyclical position is better than it was a year ago. The house price growth has slowed down. That is four or five per cent, so that is a better position than double digit. The other measures of housing market conditions are more comfortable than they were a year ago. Again, if you put what has happened in the last year in a longer term context there was a very big run-up in the 1990s in the ratio of house prices to income. That was because we could all borrow more as inflation came down and the financial system was liberalised. We all borrowed more, and the main effect of that was to push up the average house price relative to our income. Then, since 2002-03, the ratio of house prices to income has moved; it is up and down, but it has broadly moved sideways and it is a bit up over the past year. As the father of three children, I worry about that because people are paying so much for their housing. The solution to that—and I am going to sound like a broken record here—is housing supply and investment in transportation infrastructure. We pay a lot for our houses not because of the kinds of materials and the construction costs; it is because of the land. The value of our land relative to our income is incredibly high. Why is that? Because well all want to live in these fantastic cities close to the coast, and we have not invested enough in transport. The locational value of land is really high, and that is the underpinning factor to high house prices. We can do something about that through zoning and through transportation. That is the best thing to do about it. Again, that is not something the central bank has any involvement in. So, my day-to-day focus is on what is happening right now in the market—and I am a bit more comfortable about that. The other issue—I worry about it really as a parent.
Mr BANDT: Focusing on what you do have control over—and you said they are not things that you do have control over—it seems to me and certainly a number of commentators have suggested that, given the lever that you have to pull, lower interest rates get transmitted quite quickly to the housing market in the form of higher prices but much more slowly or perhaps with much more muted effects to other parts of the economy. The lever that you are pulling has a significant impact on pushing up housing prices to the point where house prices are so high that, for people like your children, as you were referring to, and for many of the people that I represent, particularly in an inner city like Melbourne, where we have seen house prices go through the roof, now cannot buy their first home. And not only that, it is being transmitted in a way that assists investors more than first home buyers. Is that something that the Reserve Bank thinks about or agrees with?
Dr Lowe: The high level of house prices relative to our incomes is not primarily a result of our interest rate policy. This is the broader point that I was making there of some of the broader things that are going on in the society—the access to credit, where we want to live and location restrictions or zoning restrictions. That is why house prices are high relative to our incomes. From quarter to quarter, I agree with you that our decisions do influence housing prices, but those movements are really ripples around a longer term trend which is determined by these more fundamental factors. I have observed that the two interest rate cuts we have had this year do not seem to have stimulated a new round of house price increases. In fact, house price growth has slowed over the course of the year, and I think that is good.
Mr BANDT: Does the Reserve Bank think houses are overpriced?
Dr Lowe: I do not have a strong view on that. They are high. I think it would be good for us all if the cost of our housing relative to our income were a bit lower, but I do not want to say that the housing is overpriced. It really is reflecting the choices on access to finance—I do not want to go over it again—that collectively we have made as a society. We have what we have as a result of those choices. It is not primarily about interest rates. Low interest rates have probably pushed up house prices a bit, but it is a bit more around this longer term thing.
As you can see, Dr Lowe made some good general statements about people “paying so much for housing”, which he worries about because he is a “father of three children”. But then he refused to acknowledge whether Australia’s housing is overpriced noting that “he does not have a strong view” and that it merely reflects the collective “choices” we have made as a society.
Lowe also correctly noted that high house prices are really because of high land prices, and that Australia needs to do more on the supply-side, including through better urban planning/zoning and infrastructure investment.
While there is nothing inherently wrong with what Lowe said, my key gripe is that his statements were too general, nowhere near strong enough, and have done absolutely nothing to pressure the government into policy action on housing.
What Dr Lowe should have done is stated explicitly that the RBA is severely limited in what it can do and then urged the government to take action and assist the RBA to mitigate risks via broad-based policy reforms to both the demand and supply-sides.
A good template for the RBA to follow was provided in the Reserve Bank of New Zealand (RBNZ) Deputy Governor Grant Spencer’s excellent speech in August, which examined the growing imbalances in the New Zealand housing market and called for a broad policy response from the Government on multiple fronts. Here are some of the extracts:
New Zealand is experiencing a housing market boom… Evidence from housing cycles in several advanced economies suggests that the longer this continues, the more likely there will be a severe correction…
Overall, New Zealand house prices relative to incomes are 32 percent above their long run average, and the second highest in the OECD. The IMF estimates that New Zealand house prices are around 20-40 percent overvalued based on long run affordability metrics…
Our concern is that a severe housing correction would pose real risks for financial system stability and the broader economy. The banks are heavily exposed to housing with mortgages making up around 55 percent of total assets. Household debt, at 163 percent of household income, is at a record level…
A dominant feature of the housing market resurgence has been an increase in investor activity… The Reserve Bank considers that rising investor participation tends to increase the financial stability risks relating to the household sector in severe downturn conditions…
On-going supply-side constraints combined with rapid growth in the demand for housing continue to create significant imbalances in the housing market, particularly in Auckland. In order to relieve those imbalances, a range of initiatives is needed to increase the long-term housing supply response and moderate housing demand. The relevant policy areas extend well beyond financial policy and the responsibilities of the Reserve Bank. In this regard, we see the Reserve Bank as part of a team effort.
The Productivity Commission’s Report, Using land for housing, released in October 2015, notes that an insufficient supply of land ready for new housing remains at the heart of the rise in house prices seen in Auckland and other high growth areas of the country. Costly and restrictive planning rules and regulations, insufficient provision of infrastructure required to make land ready for development, and a planning system unable to respond adequately to changing demand patterns were among the factors the Commission cited as contributing to the shortfall in housing-ready land.
The Commission proposed a range of measures for the Government and local councils…
While boosting the capacity for development and housing supply is paramount, it is also important to explore policies that will keep the demand for housing more in line with supply capacity. Two areas for on-going consideration include tax and migration policy. On the tax front, the implementation of the bright line test for housing investors introduced in October last year has helped curb short-term speculative activity in the housing market. Consideration might be given to further reducing the tax advantage of investing in residential housing.
Like taxation of investor-owned housing, migration policy is a complex and controversial issue. However, we cannot ignore that the 160,000 net inflow of permanent and long-term migrants over the last 3 years has generated an unprecedented increase in the population and a significant boost to housing demand. Given the strong influence of departing and returning New Zealanders in the total numbers, it will never be possible to fine-tune the overall level of migration or smooth out the migration cycle. However, there may be merit in reviewing whether migration policy is securing the number and composition of skills intended. While any adjustments would operate at the margin, they could over time help to moderate the housing market imbalance…
In this speech, the RBNZ clearly explained the state-of-play and risks, highlighted its limitations on the policy front, and called-on policy makers for assistance via action on land supply, planning, tax policy, and immigration.
The RBNZ attempted to use its high profile to force policy makers into action. And following the delivery of this speech, there was vigorous debate from all sides of politics on the issues raised, which continues today.
Now compare this open and transparent approach to the RBA. Throughout the whole bubble period, it has rarely spoken-up on housing-related issues and rarely explained to the public and politicians exactly what reforms are needed to restore balance to the housing market and broader economy. The RBA has avoided political confrontation at all costs.
Accordingly, Australia’s policy makers have effectively been given a free pass to continue blowing the bubble via ineffective supply-side policies, distortionary tax policies, weak controls on money laundering, as well as sustained high immigration, much of it from questionable sources.
In short, the RBNZ has proven itself to be a genuine central bank and prudential regulator that holds the government accountable, whereas the RBA has performed more like a paper tiger.
While it is still early days, Dr Lowe appears to have continued in this timid mould – serving his political master rather than acting strongly and independently.
