Steven Keen backs macroprudential

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ScreenHunter_29 Aug. 22 11.42

By Leith van Onselen

A key point of discussion in the weekend’s podcast with Catherine Cashmore and Dr Steve Keen on housing was the different approaches to housing policy adopted in Australia and New Zealand, despite both countries facing very similar housing dynamics: essentially the same banking system; similar levels of leverage; the same official interest rates; and similar planning policies.

Unlike the Reserve Bank of Australia (RBA) and the Australian Prudential Regulatory Authority (APRA), which continue to hose down concerns about risks building in the Australian housing market, New Zealand’s central bank and prudential regulator, the Reserve Bank of New Zealand (RBNZ), has taken the bold move of implementing macro-prudential curbs on riskier mortgage lending in a bid to cool house prices.

And whereas the RBA has been largely silent on the structural factors pushing-up Australian house prices, the RBNZ has issued numerous stern public warnings to policy makers that they must address housing affordability front-on via reforms to its constipated planning and land-use systems, which have made New Zealand housing supply unresponsive and helped to push-up prices, in the process increasing speculative activity and panic buying from those affraid of “missing-out”.

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The pull-back in credit to higher risk borrowers (e.g. first home buyers) from the RBNZ’s macro-prudential curbs, as well as the ongoing “moral suasion” about the dire need for policy reform, has stung New Zealand’s politicians into action, with housing affordability now front-and-centre of the political process.

Today Dr Steve Keen has posted a great article in Business Spectator comparing the near identical positioning of the Australian and New Zealand’s housing markets, as well as the polar opposite policy approaches adopted in each country:

Compare the following two statements, and see if you can guess who the speakers are, when they made these speeches, and what they announced in them:

“[We are] concerned about the rate at which house prices are increasing and the potential risks this poses to the financial system and the broader economy. Rapidly increasing house prices increase the likelihood and the potential impact of a significant fall in house prices at some point in the future. This is particularly the case in a market that is already widely considered to be over-valued” (Speaker One).

“… Some commentators have taken the view that the property market dynamics are worrying. My own view, thus far, has been that some rise in housing prices is part of the normal cyclical dynamic, that it improves the incentive to build, and that a price rise reversing an earlier decline probably isn’t something to complain about too quickly. Moreover, credit growth, at between 4-5 per cent per annum to households, and less than that for business, does not suggest that rising leverage is so far feeding the price rise. Hence it has been a little too early to signal great concern,” (Speaker Two)

The former is Graeme Wheeler, the Governor of New Zealand’s Reserve Bank, on August 20th, in a speech in which he announced the introduction of controls on Loan to Valuation Ratios.

The latter is Glenn Stevens, the Governor of Australia’s Reserve Bank, more than three months later (October 29), in a speech in which he announced bugger all.

You might imagine that the house price and mortgage debt dynamics of these two countries are very different, since the same authority figures reached such different conclusions on whether they should take any action. You would be wrong. The similarities between Australia and New Zealand – on house prices, mortgage debt, and interest rates – far outweigh the differences.

…bravo to Graeme Wheeler and his staff for taking action. But Australia’s Reserve Bank remains complacent…

Life would be so much simpler if you copied the Kiwis and introduced Loan to Valuation Controls, wouldn’t it Glen?

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Dr Keen’s charts are well worth a look and highlight the striking similarities between the two housing markets. He also provides numerous other examples contrasting the views of the straight talking RBNZ governor, Graeme Wheeler, with those of the “nothing to see here” views of Glenn Stevens. What is missing from Dr Keen’s analysis, however, is a summation of the bold reforms also being undertaken by the National Government in New Zealand, which are aimed at freeing-up land supply and the constipated housing system (see here) – something that has not even registered on the radar of Australia’s politicians and policy makers.

The do-nothing approach in Australia shows just how delinquent Australia’s policy makers are in addressing housing affordability, which is unnecessarily burdening younger Australians with crippling housing costs and debt, and is acting as a millstone on productivity via excessively high land prices. Australia would do well to follow our counterparts across the pond.

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About the author
Leith van Onselen is Chief Economist at the MB Fund and MB Super. He is also a co-founder of MacroBusiness. Leith has previously worked at the Australian Treasury, Victorian Treasury and Goldman Sachs.