The Business does the RBA’s housing dilemma


By Leith van Onselen

ABC’s The Business last night aired its final segment in its three part series on housing, which this time looked at the dilemma facing the RBA as it tries to juggle a deteriorating economy in need of stimulus with a red hot Sydney (and to a lesser extent Melbourne) housing market.

The segment featured, amongst others, CLSA banking analyst Brian Johnson, the OECD’s Adrian Blundell-Wignall, and Emeritus Professor Mike Berry from RMIT’s Centre for Urban Research.

Blundell-Wignall was particularly blunt when he described the RBA as having “conflicts in their policy objectives” referring to its need to balance financial stability and housing risks against the broader economy.

He argued that the shift towards macro-prudential policies was necessary in the short-run but not a panacea and certainly no substitute for good policy making.

Professor Mike Berry warned about the potential for a boom-bust cycle:

“Prices can come down just as quickly as they go up and, if that happens, of course there are feedback effects into the broad economy as households start to pull back on their spending and try to pay down debt”…

“Banks call in loans, get much more selective about who they lend to and for what purposes. So you can have a downward spiral.”

Whereas NAB’s chief markets economist, Ivan Colhoun, called on the Government to take the heat out of the property market via fiscal policy.

Obviously, the Abbott Government had a chance to assist the RBA via negative gearing reform, but has now ruled it out. This has left the ball well and truly in the RBA/APRA’s court.

What bugs me most is that RBA Governor has not taken a firmer public stance against Australia’s policy makers, and warned that monetary policy cannot work as intended without policy support, most notably around tax.

I guess when you are being paid $1 million-plus a year, it pays to remain silent.

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Comments

  1. ACTION NEEDED TO REDUCE HOUSING IMBALANCES … GRANT SPENCER DEP GOV RBNZ

    http://www.rbnz.govt.nz/research_and_publications/speeches/2015/action-needed-to-reduce-housing-imbalances.pdf

    … extract … page 13 …

    Auckland house prices are particularly stretched, having increased by three times since the start of 2002. This stretch is emphasised by the recent Demographia affordability survey that shows Auckland to be the ninth least affordable city out of 86 major metropolitan areas (population over 1 million). In September 2014, the median Auckland house sale price was 8.2 times the median household income, compared to a survey median ratio of 3.8. Nationally, New Zealand’s median house price-to-income ratio is about 5.0…. read more via hyperlink above …

  2. “What bugs me most is that RBA Governor has not taken a firmer public stance against Australia’s policy makers, and warned that monetary policy cannot work as intended without policy support, most notably around tax. I guess when you are being paid $1 million-plus a year, it pays to remain silent.”
    That’s about the only plausible conclusion.

  3. In December 2006 I was telling my eye specialist that I had gone to cash and we were discussing upcoming financial events, I foolishly said to him that all that needed to happen was everyone cut spending by 10% and save this amount.
    This man is world famous and had just built a new hospital/clinic and is older than me, he astounded me by saying that it simply wasn’t possible for them to cut spending, it was full speed ahead or crash.

    I think that the responsible officials in our government feel that way as well, they will let the federal deficit rip as high as they can and try to keep houses being built, and hope for the best. What else can they do ? They feel trapped and scared. Whatever they do now is likely to be wrong, better to do nothing.

  4. This story has an error “lower interest rates have resulted in the unwanted side effect of higher property prices” I’m pretty sure there are some RBA statements from the beginning of this easing cycle explicitly stating property development to get us over the mining investment cliff was the goal.

    • Cool! “Australia……is screaming towards what may be one of the greatest and colossal economic breakdowns in modern Western history…. this prediction will be a truly heartbreaking result….. where good people will unfortunately lose everything they have spent their lives working for….”

      • The sad part is that the people who will loose everything will be the people who saved real money and did not get into debt.

        I’m afraid for those people who have saved a deposit but not yet bought a home. If the banks crash, they will be devastated while those in debt will be ok.

      • “The sad part is that the people who will loose everything will be the people who saved real money and did not get into debt.

        I’m afraid for those people who have saved a deposit but not yet bought a home. If the banks crash, they will be devastated while those in debt will be ok.”

        I’ll respectfully and completely disagree with that.

        Those who don’t have debt will be the winners of any major crash in Australia (all other things equal). The losers will be those who are excessively leveraged and lose their jobs and/or the rents that they need to keep afloat. Being forced to sell highly leveraged assets in to a falling market is a great to become bankrupt.

      • “The sad part is that the people who will loose everything will be the people who saved real money and did not get into debt. If the banks crash, they will be devastated while those in debt will be ok.”

        It’s almost unimaginable that the Australian government would fail to honour its explicit deposit guarantee. The subsequent loss of confidence in the government’s ability to function and meet its liabilities would be catastrophic. I don’t think anyone walks away ok from such an event!

  5. Even StevenMEMBER

    Governor Stevens is looking increasingly like a coward, or caught by the political system.

  6. I feel the good ship “macro pru” has sailed. It was always going to be somewhat schizophrenic when juxtaposed with the tax provisions (main residence exemption, NG, 50% CGT discount, depreciation/capital works deductions, allowing SMSFs to leverage) FHB incentives, and vested interests. Besides, the damage is done. Given the mountain of bank fuelled private debt, the RBA are in a bind because they cannot lift rates without crashing the economy.

    • When did the economy become the responsibility of the RBA, or any CB for that matter? If GS was competent and doing his job he would have put all this crap back on the government and the people where it belongs. If they stuck to their knitting and managed true inflation (note: it has been hyper since 1998) we would not be in this position and the last decade+ would have been a much better experience for all except the real life reusa’s out there.

      • So true Andy. But for being such a compliant little lap dog he’s effectively tripled the Governor’s salary and I bet he’ll look to extend again once this term ends.

      • I never said the economy was the RBA’s responsibility Andy! The RBA has a statutory the Reserve Bank Act 1959 (Cth) s 10(2) which states that it is the duty of the Reserve Bank Board, within the limits of its powers, to ensure that the monetary and banking policy of the Bank is directed to the greatest advantage of the people of Australia and that the powers of the Bank … are exercised in such a manner as will best contribute to: (a) the stability of the currency of Australia; (b) the maintenance of full employment in Australia; and (c) the economic prosperity and welfare of the people of Australia.

      • Wasn’t having a dig at you Alex, didn’t mean it to come across that way. RBA have collectively done a shocking job of their charter, a definite fail IMO, and the media lack critical analysis of these unelected self serving pricks. CB abolishment welcome. And charter (c) seems to have been interpreted by adding “… providing they are real estate owning/borrowers and not scum renters/savers.” 🙂

    • “It’s still a f#cking coconut!”

      lol! I think it’s the first time I’ve heard an explicit language warning at the beginning of an ABC business report..

  7. RBA can open a retail bank and offer rates of 6% to domestic savers. This would allow them to lend all they like and correct the bubble without impacting on foreign currencies flooding in to take advantage of high interest rates.