The “Greenspan put” was a term coined in 1998 after the Federal Reserve, under Chairman Alan Greenspan, dramatically lowered interest rates following the collapse of the investment firm Long-Term Capital Management.
By allowing investors to borrow funds cheaply, the Federal Reserve effectively acted to prop-up securities markets, thereby averting a potential downswing in financial markets. However, in acting this way rather than letting markets fall, investors formed the belief that Greenspan would continue to manipulate monetary policy in order to maintain market stability (and asset prices), minimising downside risks and increasing moral hazard in the process.
The Australian housing market is often thought to operate in a similar manner, with investors believing that downside risks to prices are mitigated by the Reserve Bank of Australia (RBA) lowering interest rates when needed, in addition to policies implemented by the various governments aimed at supporting prices (e.g. first home buyer grants, changes to foreign ownership rules, higher immigration, bank funding guarantees, etc).
Today, Business Spectator’s Stephen Koukoulas has penned an article effectively calling for the “Stevens put” – i.e. further rate cuts by the RBA in order to support Australian housing values:
House prices are falling again. If these falls are the start of a new trend lower rather than just a bit of a blip, it could be a very unpleasant signal that will require a policy reaction from the Reserve Bank.
According to data compiled by RPData, house prices have fallen 1.5 per cent in less than two months since the end of March to take a chunk out of the 2.6 per cent rise that was recorded in the first three months of 2013. House price are up just 1.2 per cent in net terms since the start of the year.
…the recent Reserve Bank policy bias to further cut interest rates will only be reinforced by the recent house price declines. If the price falls gain momentum, there could even be a scenario when the central bank drops the cash rate more than the futures market is currently pricing – say to around 2.0 per cent. In a worst case, official interest rates could be 1 point something per cent which I suspect would be enough to underpin house prices and fend off the nasty effects of a house price bust.
The cynic in me would suggest that the Kouk is calling for interest rate cuts in order to support his prediction at the start of the year that Australian house prices would jump by 10% in 2013. To be fair to the Kouk, however, he did also argue in January that the interest rate cutting cycle was probably over citing, amongst other thing, the nascent recovery in housing prices. So he is at least being consistent in linking house price growth to monetary policy.
There is also a question about whether the Kouk should rely so heavily upon the RPData Daily House Price Index in forming his judgments on interest rates. As with most economic data it is the trend that matters and when one looks across the gamut of house price indexes it is obvious that the trend has been a slow climb since the bottom. Jumping on every move in an inherently volatile index is likely to lead to equally wild commentary.
The broader question is whether the RBA should cut interest rates to support housing values? Such a move risks heightening moral hazard by strengthening the belief that the authorities will always intervene to support the housing market, leading to investors discounting downside risks. Lower interest rates also punish savers, leaving them with less disposable income and spending power.
That said, interest rates are likely to continue to fall irrespective of the level of house prices. With the mining investment boom coming to an end and the Australian dollar still stubbornly high, the RBA will need to reduce the interest rate differential in order to place downward pressure on the currency and facilitate non-mining growth.
The Stevens’ put will continue, though not necessarily for the same reasons espoused by the Kouk.
