Domain continues its laudable series bashing the RBA today. It has good sources, especially our favourite, Gareth Aird at CBA, but, alas, I have to disagree with its conclusion that Australia has delivered its last “kick of the can” to house prices:
- The RBA does care about house prices (mostly true).
- Financial liberalisation is the key driver of the boom.
- Gareth Aird says at zero rates the game is over.
The game might be over but it will be a political decision if so, not economic nor monetary.
There is nothing to stop the RBA from lowering Australian mortgage rates further. There will be prices to pay for it doing so. But it is quite possible.
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All it needs to do is follow the lead of the ECB, a path down which it has already begun.
For nearly a decade, the ECB has been buying more and more bank liabilities via a money-printing facility called the TLTRO. It now pays banks -100bps to lend up to 50% of bank liabilities.
Interest rate: Initially variable with main refinancing rate plus 10 bps; later lowered to be 50 bps below prevailing main refinancing rate (10 to −100 bps). Initial allowance: 30% of eligible stock of loans less any existing TLTRO outstanding; later raised to 50% of eligible stock of loans less any existing TLTRO outstanding.
That has dropped European mortgage rates as low as 50bps, far below Australia’s.
There is no reason why the RBA could not do the same. During COVID is started a TLTRO-equivalent in the Term Funding Facility (TFF). It only holds 3% of bank liabilities and is only half used up as it is:
Then there is the deeply corrupt APRA which fired off this new bubble in 2019 (only briefly interrupted by COVID):
The Australian Prudential Regulation Authority (APRA) has announced that it will proceed with proposed changes to its guidance on the serviceability assessments that authorised deposit-taking institutions (ADIs) perform on residential mortgage applications.
In a letter to ADIs issued today, APRA confirmed its updated guidance on residential mortgage lending will no longer expect them to assess home loan applications using a minimum interest rate of at least 7 per cent. Common industry practice has been to use a rate of 7.25 per cent.
Instead, ADIs will be able to review and set their own minimum interest rate floor for use in serviceability assessments and utilise a revised interest rate buffer of at least 2.5 per cent over the loan’s interest rate.
That buffer could be cut further, even to zero, increasing average mortgage sizes and bringing in more sub-primers. APRA could also ease its other speed limits on investors and interest-only loans.
All of this is slow-motion economic suicide. It increases inequality and creates a demand deficit. It slowly kills bank margins and the financial system. It hollows out productive investment.
But all of these can go on for many years yet if we choose for them to do so.
The decision to end it is purely political.