RBA chief blames house prices on “strong population growth”

Bit of a Freudian slip today from RBA chief Phil Lowe in parliament:

One area that we are watching closely is the cycle in residential construction activity, as the upswing has helped support the economy over recent years. The rate of new building approvals has slowed, but there is a large amount of work still in the pipeline, particularly for apartments, so we still expect some further growth in this part of the economy this year. There has, however, been some tightening in conditions for property developers in some markets.

In the broader housing market, the picture remains quite complicated. There is not a single story across the country. In parts of the country that have been adjusting to the downswing in mining investment or where there have been big increases in supply of apartments, housing prices have declined. In other parts, where the economy has been stronger and the supply-side has had trouble keeping up with strong population growth, housing prices are still rising quickly. In most areas, growth in rents is low. And recently we have seen a pick-up in growth in credit to investors, which needs to be watched carefully.

In terms of consumer prices, a year ago we had expected the inflation rate to remain above 2 per cent. It has turned out to be lower than this last year, at around 1½ per cent. Wage growth has been quite subdued, reflecting spare capacity in the labour market and the adjustment to the unwinding of the mining investment boom. We anticipate the subdued outcomes to continue for a while yet. Increased competition in retailing is also having an effect on prices, as is the low rate of increase in rents.

We do not expect the rate of inflation to fall further. Our judgement is that there are reasonable prospects for inflation to rise towards the middle of the target over time. The recent improvement in the global economy provides some extra assurance on this front. Headline inflation is expected to be back above 2 per cent later this year, boosted by higher prices for petrol and tobacco. The pick-up in underlying inflation is expected to be more gradual.

Since we appeared before this Committee last September, the Reserve Bank Board has kept the cash rate unchanged at 1.5 per cent.

At its recent meetings the Board has been paying close attention to the outlook for inflation as well as two other issues: trends in household borrowing and in the labour market.

One of the ways in which monetary policy works is to make it easier for people to borrow and spend. But there is a balance to be struck. Too much borrowing today can create problems for tomorrow, because debt does have to be repaid. At the moment, most households with borrowings do seem to be coping pretty well. But the current high level of debt, combined with low nominal income growth, is affecting the appetite of households to spend, and we are seeing some evidence of this in the consumption figures. The balance that is required is to support spending in the economy today while avoiding creating fragilities in household balance sheets that could cause problems for the economy later on. This is also something we need to watch carefully.

Trends in the labour market are also important. As in the housing market, the picture in the labour market varies significantly around the country. Overall, the unemployment rate has been steady now for a little over a year at around 5¾ per cent. In a historical context this would have been considered a good outcome, although, today, a sustainably lower unemployment rate should be possible in Australia. The other aspect of the labour market that is worth noting is the continuing trend towards part-time employment. Over the past year, all the growth in employment is accounted for by part-time jobs. There is a structural element to this, but it is also partly cyclical. We expect that the unemployment rate will remain around its current level for a while yet.

The Reserve Bank Board continues to balance these various issues within the framework of our flexible medium-term inflation target, which aims to achieve an average rate of inflation over time of 2 point something. Our judgement is that the current setting of the cash rate is consistent with both this and achieving sustainable growth in our economy. We will continue to review that judgement at future meetings.

Dr Lowe went on about the dollar:

I would like it to be lower than higher, if I had that choice.

He’s not going get it while he talks like this! At least, not until either APRA gets off its arse and tightens enabling him to cut again or his jawboning of housing lifts the dollar to an economic choke point.


  1. FiftiesFibroShack

    “And recently we have seen a pick-up in growth in credit to investors, which needs to be watched carefully.”

    At least he didn’t let the banks completely off the hook. Wet lettuce leaf deployed.

  2. “I would like it to be lower than higher, if I had that choice.”

    Lower dollar = less purchasing power = lower living standards.

    This not consistent with one of the objectives of monetary policy under the RBA Act, which is “the economic prosperity and welfare of the people of Australia”.

    “a sustainably lower unemployment rate should be possible in Australia”

    Message to Government: “pull your finger out on structural improvement to the labour market”

  3. “But the current high level of debt, combined with low nominal income growth, is affecting the appetite of households to spend, and we are seeing some evidence of this in the consumption figures.”

    Interesting that he acknowledges a link between high house prices and *lower* spending which is a break with the Stevens era “wealth effect” mantra.

  4. “…I would like it to be lower than higher, if I had that choice…”

    Wot a laff Governor.

    The only reason Lucky Phil does not have that choice is because the RBA and APRA are making other choices.

    In order to keep mortgage rates as low as possible and thereby entice households and speculators (is there a difference anymore?) deeper and deeper into debt it is critical that APRA allow the doors to unproductive capital inflows to remain as wide open as possible.

    That means upward pressure on the exchange rate. Sure flogging off assets and government bonds offshore is part of the problem as well but that household debt binge involves hundreds of billions of external liabilities of many shapes and sizes.

    Reducing the upward pressure on the exchange rate by restricting the unproductive capital inflows would mean higher mortgage rates (we are not Japan with a CAS) and when it comes to choosing between a lower exchange rate and lower mortgage rates Lucky Phil, the RBA, APRA and the government are in complete agreement.

    The problem with Macroprudential is that restricting credit to nice wholesome borrowers rather than speculators is very likely to result in the housing market going soft very quickly and that means credit creation will soften and the downward deflationary spiral commences.

    That is why Macroprudential measures never seem to work and disappoints its supporters. If they really worked the RBA and the Treasurer would have kittens and stop them immediately.

    And that is before we even get to the bizarre idea that we should try to keep a housing market inflated by encouraging FHB and other wholesome borrowers to take on whale loans juiced with unproductive capital inflows. Better to leave a tulip mania to the speculators who are best able to bear their losses.

    If you want a lower exchange rate you need to slow the unproductive capital inflows. But if you do that you are going to fill the Debt Machine petrol tank with sugar. So guess what – the exchange rate is allowed to be driven up to keep the housing market afloat.

    Now we could reform the monetary system so that the economy does not run on household debt but that important discussion is still a few years away.

    It is unavoidable but we can ignore it for a few more years yet.

    Choices Lucky Phil – just a matter of choices.

    • Spot on pfh
      The non-productive capital flows, and the whole stupid modern macro model where speculative inward capital flows are treated equally with productively produced exports, are really at the core of the problems. At least without them we would have to address all the serious underlying economic, social and productive issues.

      I am really looking forward to the discussion from MB addressing this issue!!! Bwahahahaaaaaaaaa!!!!!! (I’ve been waiting a few years so far!)

    • +1 Glenn Stevens grand experiment in extreme financial repression has driven a massive malinvestment bubble and proved to be monumental failure.
      To continue to do so would be criminally negligent.

    • Better to leave a tulip mania to the speculators who are best able to bear their losses.
      So true. The reason the recession following the dot-com boom wasn’t so awful was because only people with a lot of spare capital could invest in Pets.com. Of course, the increased financial deregulation and lowered interest rates that followed created another sort of problem…

    • Once upon a time the RBA controlled lending through quantitative limits not by adjusting the price of credit. But it wasn’t called macro-prudential. And it worked.
      Once upon a time banks were only able to accept domestic deposits and their were strict controls preventing them sourcing funding overseas and on foreign bank entry. All foreign debt was held officially – there was no private foreign debt.
      Then along came Paul Keating, who held a gun to the nations head (the Campbell inquiry) and said the capital and lending controls had to be abandoned or else the non-banks would slip through the regulatory cracks and circumvent them.
      Better to follow a “free market” approach and put everyone on the same playing field. ie. no rules.
      After the early 90s recession he knew he had made a catastrophic failure. Essentially creating a Frankenstein too big to fail monster which has to be allowed to double down year after year else everything collapse:
      The credit creation machine could *never* be turned off – this was known in the late 80’s:
      Said Paul Keating: ‘The old domestic banks went like charging bulls into credit expansion from 1985 on … They did this at the expense of their book quality. … And in a sense they won. Eventually, they had us in a position where we dared not check them less they failed. Westpac and the ANZ virtually did fail: the government and the Reserve Bank had to hold them together until they got back on their feet. There was an obvious time in the 1980s to stop this credit creation, but no one would stop”
      This guy is 100% responsible for this model. Yet he is still worshipped as a great leader.

      • Sweeper You know i agree with you on this stuff. I also opine Howard /Costello doubled down…could it be anything else but knowingly.
        Just for the sake of it…I do hold the opinion that by the time Keating et al arrived on the scene the economy had already begun to fail in a major way. We’d been runn. ing CAD’s that required financing for over 25 years. Pretty obviously this cannot go on for 25 years without serious distortion of the economy Keating was faced with reforming that distortion (political suicide) OR opening the floodgates so that the whole schmozzle could be financed. I doubt keating’s ego could have accommodated political suicide! In any case he might have been sent for a ‘swim’ before he managed to pull the economic levers.
        So now we have a BS economy built on BS economic theory that is so distorted after 60 odd years that ANY attempt to reform it will prove catastrophic. Not reforming will be more catastrophic for future citizens but who gives a stuff eh? It’s all about me and it seems likely this stupidity can be maintained until after I shuffle off this mortal coil.

      • That’s true. There definitely was pressure to take the route he took. The Campbell inquiry pushed the line that the deregulation was both inevitable and unavoidable. As a capital importer, with global capital markets opening up, the money would come in somehow. Either they had to extend the regulatory net to everyone or abandon it. That was the line. Keating unfortunately was never able to see the full picture.
        The difference with the CAD then though was that they only rarely exceeded nominal GDP growth which mean’t the foreign debt never really grew as a share of GDP. From memory, it was about 15% when Keating started deregulating. And it really was all government debt in foreign hands. The periods aren’t comparable. Now Macquarie borrows overseas (with implicit government backing) to buy junk bonds and plane leasing portfolios.

      • Sweeper,

        Kearing’s reputation largely depends on the fact that most of the public don’t understand… yet….the implications of the choices he made. They will of course because everyone seems to have suddenly started to wake up to the bulldust they have been fed for 30 years.

        I will cut Keating some slack though as what he was pushing for is what the US was pushing for and insisting all their ‘friends’ get on board with.

        Free flows of international capital.

        That prescription stuffed up countries all around the world. Asia, Japan, Russia etc.

        Most of them got smart after being burned and introduced all sorts of administrative measures to inhibit the flows or to counteract them.

        Naturally Australia as the US’s longest and most loyal and most lick spittal ally has done nothing and instead has opened the doors to unproductive capital inflows wider and even extended the privilege to the commies in Beijing 🙂

        Keating was wrong and still refuses to admit it and that is not good but he was applauded every step of the way by the likes of the current government and Howard and Costello strapped after burners to the model in late 1990s.

        1996 was a long time ago and a change of direction AFTER Keating would have made a huge difference.

  5. If Lucky Phil wants a lower $A he can have it – just sell $A and buy the currency basket. This would impose currency losses on foreign bondholders, but they don’t pay his salary or vote. We are fully stocked with Porsche Cayennes, so, just do it.

      • proofreadersMEMBER

        The RBA is a financial weakling (total assets $167bn; total capital and reserves $24bn) when it comes to fighting any currency war in the absence of government money printing. It is a one-trick pony (lowering the cash rate) – that’s its peashooter.

    • “”If Lucky Phil wants a lower $A he can have it – just sell $A and buy the currency basket.””

      David This piece of baloney gets floated here everytime there is a discussion on the A$ value. It’s been continuously debunked. So one more time so we can get rid of this patently false fairy story.

      To reduce the value of the A$ the RBA would have to sell bazillions of A$ which it would create out of nowhere. Now this then leaves the RBA holding lots of other currencies but results in foreigners holding the baziilions of A$ it has ‘printed” Now given our CAD it is clear we have very little the rest of the world want except for minerals and farm goods and there are obviously limited markets for those. So foreigners would therefore buy up our assets – what (few) mines remain, industrial capacity for manufacture to the building industry (there is little else), what’s left of the food chain outside the farm gate and farms. That process reverses the outflow of A$ stimulated by the RBA activities leaving Aus flushed with massive liquidity injections. Now the RBA has to clean these up with higher interest rates again exacerbating the rise in the A$ or it let’s either or both the inflation and the CAD rip (thereby creating more debt).

      If we are going to deal with our problems we need to really understand there are no quick painless solutions to the problems we have created over 60 years. They will not be solved by the sort of fairy story theories currently being run by the present economic gurus who are running a political /social agenda rather than dealing with economic facts.
      These problems are now financial, economic, biological and environmental, political and social.
      The answers lie back in time

      P.S. The solutions are complex and our choices have major repercussions. Our choices will vary the mix or outcomes we get but where we are sitting now this is the inevitable road we would follow.

      • flawes, you are correct. However there is a simply policy that could be implemented.
        Given the huge CAD, those $$$ need to get reinvested back into Aussie assets ( or debt ). But if you restrict ( slow down /tax / make less attractive ) foreign ownership, then those foreign holders of AUD would more inclined to Hit-the-bid on the AUD and exchange for some other currency. In theory, if the taxes were high enough the AUD would loose value and find a level where exports = imports ( plus debt payments ).
        Free trade agreement and open border policy for capital flows stop CAD countries exchange rates from finding an trade balanced equilibrium

      • MediocritasMEMBER

        Aeroplanes have little trim-tabs on the rudder and elevator that can be adjusted to take pressure off the controls. It’s actually possible to vector on a calm day by just using the trim.

        We now have an economics profession that believes primary controls aren’t even necessary. Conditions have been calm for so long, and they’ve been flying on trim (diddling interest rates), that it’s now all they know. They honestly think that rates ARE the primary controls! A little turbulence or vectoring that requires a greater rate of change to deal with, than what the trim wheels can achieve, and it’s a mayday situation.

      • Good one!! I have a bigger problem with modern economics – they think it is the cockpit of the plane as you describe but they think also that the plane requires no contact with the ground! i.e. the resources and structure of the normal world.,
        I’m laid up after surgery. Hopefully I’ll get a bit of time to write. I was going to try to put some stuff together that the average punter could get a grip on in respect of IR’s, Fiscal policy, and the interaction with the external account etc – AND the interaction with a world in which there are actually limited resources that we are currently using up as quickly as possible.
        If I get it done I’ll run it past you.
        I might have to wear my tinfoil hat while writing!

    • Tamash
      I think we need to be careful what we wish for. In the circumstance you outline your trashing of the A$ is likely to work way too well and the dislocations that are necessarily involved will be extreme and violent and may well lead to the breakdown of the social structure.
      The point is that there is nothing here that is going to be painless. The dislocation required to re-balance our economy would be extreme even if tried at a very moderate pace. I’d opine that following your formula would be downright catastrophic. (P.S. The original idiocy is catastrophic – your formula is a result)
      Again what you describe may be part of what is necessary but don’t let anyone think we can walk away from six decades of totally corrupt economic theory and practice without a wrinkle.

  6. In the Senate Committee today Lowe said, paraphrase, ” if housing prices were the sole concern a cut to immigration would likely see housing costs improve, however, housing costs are not the sole consideration. Over 40% of Australians have at least one parent born overseas, highest rate in the world. Immigration has benefits”.

    He did again note need for infratructure to keep up with population growth noting that Melbourne currently growing at 2% a year would have 10% bigger population in only five years.

    Buy Now!!

  7. Attributing high house prices in Sydney and Melbourne solely to immigration is about as simplistically stupid as Greenspan’ proof that Current Account Deficits cause high house prices!

    Maybe these great economic theorists of today could all fly First Class to some out of the way attractive mountain resort place to discuss this to decide once and for all which of their “”çauses ‘ results in real estate bubbles. Oh wait …..they’ve been doing that for 25 years already???

    • MediocritasMEMBER

      I know right? Jesus H Christ.

      Migrant1: arrives with a hundred million bucks with intent to invest in real estate.
      Migrant2: arrives with jack shit, to take a job with 7/11.

      • MediocritasMEMBER

        Completely in agreement that the mess we’re in has a multifaceted origin. Immigration is just one of the facets.

        Just adding colour to this facet, that the contribution of an immigrant to house prices varies enormously according to the details of the immigrant.

        It’s not only simplistic to point at immigration as the sole (or primary) cause. It’s flat out wrong because waves of immigration of the same size will not necessarily have the same effect on prices. It depends on the financial actions of the immigrants in question.

      • @Mediocrita
        A lot of the people who push up property prices don’t even migrate here.

        Some random dude overseas: Australian house price rose 10% last year! Gotta get myself a few of those. Call my broker!

      • MediocritasMEMBER

        That’s true Kevin. It’s really more about the migration of capital than the migration of people.

    • Exactly, it also doesn’t tie back to the huge drop in rental yields.
      Unless new immigrants place a huge premium on buying vs renting. Which is possible. But no-one ever makes this case.
      It would also be a unique case if true.

      • The epic rise in nominal rents does partly explain the huge drop in rental yields. Of course the epic fall in interest rates is my number one suspect to explain the low rental yields.
        Go back 10 years are figure how many dollars it took to service a typical negatively geared property. Now take the rental stream over that 10 years which shows a huge rise. Now compare the numbers and the rental yields looks good compared to bank interest rates. Do you need more?
        The future prospects of continuing shortage and continuing high immigration support the yields to a degree.