The list of Australian economists prognosticators backing macroprudential is getting longer every day. It now includes MB, Ross Garnaut, Bob Gregory, Chris Joye, Kouk and the ANZ. Today we are joined by Alan Mitchell at the AFR:
State governments, including the late and unlamented Labor government in NSW, have also done their bit to make the housing recovery less bubble-prone. All the unpopular rezoning forced through by Labor has added to the effective land supply, as has its spending on public transport infrastructure. The O’Farrell Coalition government is building on that, with considerably more political skill.
But it is a strong rebound and, by the usual calculation, there is a lot of pent up demand, especially in Sydney. Lending to investors, including the SMSFs, is picking up strongly, and if prices continue to accelerate at their current rate, we soon will be entering boom territory.
If things look like they are getting out of hand, the RBA can edge up its monetary policy interest rate, although that would adversely affect non-mining business investment, which the bank wants to encourage. Alternatively, it and APRA could dampen the market with so-called macroprudential policy. The New Zealanders have already done this by limiting the proportion of high loan-to-valuation loans made by banks.
Something like that may yet save a few lump sums and spare the economy a patch of grief.
If the RBA were forced to redo 2003 then the “patch of grief” will be more like a yawning chasm. The 2003 jawboning and small rate hike campaign, which stalled Sydney house prices, only worked as a soft landing because the rest of the nation subsequently took up the borrowing slack and the terms of trade boom took off. If we reran a couple of hikes next year, with business investment already falling its furthest in 75 years and most capital cities not going to borrow, then a reckoning will be upon us. MP is much more important as an alternative than Mitchell suggests but at least backs it.
