In December last year, the Reserve Bank of Australia (RBA) released a paper entitled Taming the Real Estate Beast: The Effects of Monetary and Macroprudential Policies on Housing Prices and Credit, which examined macroprudential policy actions in 57 economies taken over the past 30 years, and combined this data with time series on housing prices, rent, housing credit and interest rates gives to provide a detailed picture of the key macroeconomic, institutional, monetary, and regulatory factors affecting housing markets globally.
According to the paper (my emphasis):
The results establish a link between interest rates and macroprudential policy actions and subsequent fluctuations in real housing prices and real housing credit. Higher short-term interest rates tend to slow housing price appreciation and housing credit growth, although the magnitude of the effect is modest. Actions categorised as prudential measures (maximum LTV and DSTI ratios, provisioning requirements, real estate exposure limits and risk weights) are consistently jointly significant in our regressions. Decreases in the maximum LTV ratio are associated with reductions in the growth rate of housing prices. Similarly, reductions in the maximum DSTI ratio and increases in provisioning requirements are associated with reductions in the growth rate of real housing credit. We were unable to find any consistent relationship between changes in non-interest rate monetary policy measures and either housing price or credit growth, however. Taken together, our results suggest that certain types of macroprudential policies can be effective tools for stabilising housing price and credit cycles. This is good news for central banks seeking additional flexibility in their pursuit of macroeconomic and financial stability objective.
Given the robust findings of this report, the fact that established house prices and finance commitments are seemingly accelerating, and that the Reserve Bank of New Zealand (RBNZ) has just implemented limits on high loan-to-value ratio (LVR) lending, why aren’t Australia’s financial regulators moving to implement similar controls on mortgage lending in Australia?
As discussed in the above segment from last night’s The Business aired on the ABC, the Australian Prudential Regulatory Authority (APRA) has refused to comment on whether macroprudential controls should be implemented in Australia, deferring to the RBA instead.
Australia’s seeming lack of coordination on this issue also raises questions over whether the separation of the prudential regulation function from the central bank is operating effectively, rather than leading to buck passing. In New Zealand, the RBNZ is responsible for both functions and, not surprisingly, it has displayed far more consistency over housing risks and the threat to financial stability.
One things for certain, it makes far more sense for the RBA/APRA to move now to implement macroprudential controls, rather than waiting to do so after prices and risks have already bolted, which could also force it to raise interest rates prematurely.
