Should APRA or the RBA ease policy?

Via the AFR’s Patrick Commins:

The RBA still has the potential to cut rates further, but by this stage that just looks like a case of indulging in “the hair of the dog that bit you”.

I would argue a more effective and targeted way to support the housing market right now would be to remove the requirement that banks assess a potential borrower’s capacity to repay using an interest rate of at least 7 per cent.

And that won’t do the same thing? Cripes. Both will make credit easier. One via the price, the other by availability.

But that’s where the similarities end. The thing is, monetary policy is not just about house prices. It is about the entire economy. MB argued for macroprudential from 2011 because it was going to enable the RBA to cut rates without misallocating credit and that, in turn, would sink the Australian dollar, triggering a growth spurt in the 40% of the economy that is tradable.

That’s what we need more than anything else. House price inflation as a growth driver is over. Households are too indebted. The mining boom is also over because China is too indebted. Today’s little boom is nothing more than a fortuitous supply-side squeeze that will pass in due course.

In these circumstances, to grow at all Australia needs a lower real exchange rate and the easiest and fastest way to get it is lowering the cash rate as far as it can go.

So long as APRA keeps the brakes on there is no downside to it. There’s not enough ammunition left in the cash rate to matter in any external shock. And asking APRA to loosen after its just been scorched by years of criminal laxity is not in anybody’s interests. The quality of bank lending will fall more unsustainable debt rise. Moreover, if APRA eases and banks lend then the Australian dollar will very likely rise and deliver lower inflation, defeating the purpose.

We’ve made monetary blunder after blunder since 2011. Let’s not make another one.

Comments

  1. What’s more, the argument for dropping below 7% seems to be “interest rates are really low so you don’t need to stress test borrowers to 7%”.

    Hang on though. Mortgages are for 30 years. Does APRA or anyone seriously reckon there is no way mortgage rates could top 7% in 30 years?

    Hint – big 4 variable mortgage rates were last above 7% in May 2012. Not that long ago.

    Stupid chunts.

    • Bit strong mate. The 30 year bond rate is currently at about 2.5% (versus lending rates of 4.68%). Seems we’re closer to Japan’s forever-low interest rates than circa-2012 Australia.

      • I am talking about variable retail mortgage rates for home loans, which is obviously the relevant test in this case. They are clearly always going to be higher than the cash rate, 30yr bond rate, etc.

    • By the time they hit 7% again, most current borrowers would be well through their mortgage term so the impact would not be great on existing borrowers.

    • I agree arrow 7% is probably a good average rate
      To think int rates will be 3.9% for 30 years is deluded

  2. Yeah, I was expecting the $A to drop around 15 to 20% after 2008 but that didn’t happen. Instead we got a housing price and building boom. Should have gone for the lower dollar instead. Then we might still have significant manufacturing industries.

    • Yeah it happened. The $aud dropped about 30% between Jun 2008 and Jan 2009 (against the trade weighted index).

  3. The problem with this AFR article and many others, is the assumption that the housing market now needs support is a ridiculous one.

    It’s been supported by governments for years, and is now moving towards a sensible equilibrium.

    Prices are already falling despite record mass immigration and before a likely Labor government brings in NG and CGT changes.

    Prices are still too high, and reducing home loan serviceability below 7% just sounds like wishful thinking.

  4. Don’t worry Macrobusiness, your bond positions will still be looking good – the RBA will still be cutting regardless of whether APRA reverses the greatest policy error in Australia in decades, which is already playing out in the pace of GDP growth collapsing to a third of what it was only a year ago, despite very health commodity prices.

    The damage done by the gravity of the policy error of stress testing at 7% plus has been too great to avoid rate cuts, even if the APRA policy error was corrected now.

    It is disappointing that Macrobusiness is not being intellectually honest about the seriousness of this policy error – it is simply economic suicide, as evidenced by collapsing money circulation in the economy and domestic recession, to stress test at this level when Australia faces decades of low interest rates ahead. It’s nothing new, Japan has already been at zero for thirty years, Europe and many others for ten. USA has faced the largest equity market daily drop since 1931 in December 2018 as it made its own policy mistake trying to pull too far away from zero.

    On top of the ‘new normal’ neutral rate for Australia which is around zero for the next fifty years plus, Melbourne and Sydney luckily have growing populations and therefore landed real estate prices logically and quite correctly decoupled from wages decades ago. Interest-only lending and stress-testing at real-world market rates are vital to maintain equilibrium in economic activity in these cities.

    The notion that policy can be used to somehow magically wean economic and local job prospects off the value of real estate in Melbourne and Sydney is totally naive and extremely dangerous – a fantasy of academic bureaucrats and armchair CEO economists that have never worked in the real world. The results speak for themselves, the domestic economy is in aggregate contraction in NSW already, and per capita recession in all states. Lending to SMEs has even reversed despite a growing population.

    A deeply entrenched culture of risk aversion, conservatism, regulation, entitlement and unionism running through all levels of society means a narrow economy is inevitable that is necessarily dependent on mining exports and real estate and its associated industries. Attempting to broaden economic activity and employment away from real-estate focused economic activity is doomed to failure as the variable labour cost component is too high and it is not possible to make an economic risk-adjust return on employing people in pure-play (no real estate involved) operating businesses in Australia due to legislated wages and conditions that make remaining viable impossible unless one breaks the labour law, as to many of the largest companies in Australia regularly. There is good reason banks only lend to SME’s when secured by real estate equity.

    Many working families have relied on accumulating their wealth in their homes or a rented property instead of starting a small business, and everything was in equilibrium until this moving of the goal posts and this serious APRA policy errors took hold.

    Encouraging the big four to retreat from lending to SMSF when there is compulsory superannuation contributions at already very high levels by global standards. despite high taxation and struggling households, and a market failure in banking completion, was another another serious policy error that will undermine construction and employment moving forward.

    If stress testing at double prevailing reveal world market mortgage costs , please also take a similarly deluded view and double wage growth, CPI and income forecasts as well. Otherwise we will continue to spectate on an unnecessary collapse in the domestic economy. One would think that the adjustable rate saga of 2006-2008 in the USA, which triggered the GFC, is enough of a recent case study on the dangers of calibrating an economic system on interest rates that borrowers simply cannot afford.

    7% plus mortgage rates will never happen in Australia in the next fifty years plus, notwithstanding the market failure in banking competition which means mortgage rates are still 50% higher than other markets with comparable or better domestic growth per capita. Unfortunately for the welfare of ordinary hard working Australians relying on the economic grasp of the most highly paid bureaucrats and policy makers in the world, until only recently the RBA expected rates to be increasing soon so it’s no wonder such serious policy errors are playing out at APRA.

    • That is quite unfair. MB has held this position long before there was an MB fund, from the start of the rate cutting cycle of 2011, and has been intellectually transparent and consistent throughout.

      If it is an error to be setting the APRA stress test at these levels then after we cut rates to zero then cutting that number should be the next step. I simply don’t know if it is an error because APRA’s various controls are so opaque and traditionally so easily gamed that it could be meaningless or important. Moreover, there have always been so many other offsets that easy mortgage credit has never been an issue.

      Nonetheless, the correct sequencing of easing is clear in macro terms. We need a lower dollar to boost the economy without turning to lower quality mortgages, again.

      We are invested in this because it makes sense and is therefore the base case. Not the reverse.

    • Jumping jack flash

      This! Growing an economy with nonproductive debt dressed as productive debt (while the debt was growing itself) was a good way to destroy an economy.

  5. Jumping jack flash

    “House price inflation as a growth driver is over.”

    Yeah…nonproductive debt attached to inherently static houses as a growth driver sure is over. And anyone who actually thought that inflating house prices with debt was growth is well and truly fooled.

    Time to put away the national get rich quick scheme now, and get back to honest business.

    And yes, crashing the dollar so people may buy our stuff is probably a good thing to try next. Now, if only we produced some things that overseas people found useful and wanted to buy…

    And only if we didn’t buy almost everything we need that is useful from overseas people using our currency…

    And only if everyone’s money wasn’t tied up with repaying insanely huge amounts of nonproductive debt plus the interest and could be used to invest and build the capacity for creating useful things that overseas people would buy..

    But getting back to a point where the economy will function properly again is going to take a lot of time to repay that nonproductive debt. It doesn’t repay itself you know. That’s the problem.