RBA: Booming property prices are not our problem

The Reserve Bank of Australia’s (RBA) deputy governor, Guy Debelle, gave a speech last night whereby he said the central bank is aware of concerns in the community regarding rising house prices.

However, Debelle expressed the view that monetary policy is not one of the ‘tools’ that should be used to address the issue. He also noted that unemployment would be higher if the RBA prematurely increased interest rates in an attempt to curb rising house prices:

One price that has received a lot of attention has been housing prices…

The Bank recognises that rising housing prices heighten concerns in parts of the community. Housing price rises can have distributional consequences. That is certainly an issue that needs to be considered, and there are a number of tools that can be used to address the issue. But I do not think that monetary policy is one of the tools. Monetary policy is focussed on supporting the economic recovery and achieving its goals in terms of employment and inflation. It is important to remember that while housing prices may not rise as fast without the monetary stimulus, unemployment would definitely be materially higher without the monetary stimulus. Unemployment clearly has large and persistent distributional consequences.

Presumably, one of the ‘tools’ that Debelle is referring to are macro-prudential measures, such as loan-to-value ratio restrictions, debt-to-income restrictions, and interest-rate buffers, which are controlled by the Australian Prudential Regulatory Authority (APRA). Other ‘tools’ include taxation policy changes pertaining to property (e.g. curbing negative gearing) and/or relaxing land use and zoning, either of which is controlled by federal or state governments.

Just last week, APRA chairman Wayne Byers hosed down speculation that the regulator would take action to cool Australia’s rapidly rising property market:

“Risk for the financial system occurs when lending standards are poor or weak,” Mr Byres told a Committee for the Economic Development of Australia event.

“We don’t see that up to now – banks have done a pretty good job in holding lending standards up.”

The APRA chief also said that regulatory settings were “broadly right”, given that the agency’s mandate was broader than stability of the financial system at all costs.

The likelihood of the Morrison Government implementing tax reforms to take the heat out of the market is zero, given it strongly opposed Labor’s negative gearing policy last election and are currently seeking to abolish responsible lending rules.

One can only wonder what the RBA would do if, like its counterpart in New Zealand, it controlled both monetary policy and prudential regulation? Having control of both levers would allow the RBA to simultaneously run stimulatory low-rate monetary policy while at the same time implementing macro-prudential restrictions to stop cheap and easy credit inflating property values.

Surely it is time for a rethink on the separation of powers between the RBA and APRA?

The Reserve Bank of New Zealand’s (RBNZ) joint responsibility has seen it take a much more ‘hands-on’ and transparent approach to managing housing risks, including via the implementation of macro-prudential curbs.

Having the RBA resume control of both monetary policy and prudential supervision would centralise responsibility. It would mean that the RBA would ‘own the bubble’ and would be forced to address mortgage risks as it maintains a low interest rate policy.

Unconventional Economist
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Comments

  1. TailorTrashMEMBER

    Not sure NZ has done much of a job managing housing risk
    …..a bit late after the bubble as blown out of all proportion

  2. happy valleyMEMBER

    Debelle (with the rapturous approval of Captain Phil) is copying the ScoMo playbook of “it’s not my job” – maybe, but the RBA is so much to blame for throwing kilolitres of ZIRP
    petrol on to the housing price bonfire. Sick.

  3. SnappedUpSavvyMEMBER

    Govt and RBA could raise interest rates to curb house prices in combination with zero immigration to lower unemployment
    right……wait….what…..oh no…..no…….BHWAAAAAAAAHAAAAAAAAHAAAAAAAHAAAAAAAAAAAAAHAAAAAAAAAAAAAAHAAAAAAAAAAAAAAHAAAAAAAAAAAAAAAHAAAAAAAAAAAAAAAHAAAAAAAAAAAAAAAAAAAHAAAAAAAAAAAAHAAAAAAAA……..oh dear …….BHWAAAAAAAAAAAAHAAAAAAAAAAAAAAAHAAAAAAAAAAAAAAAAAHAAAAAAAAAAAAAAHAAAAAAAAAAAAAAAAAHAAAAAAAAAAAAAAAAAAAAHAAAAAAAAAAAAAAAAAA……..oh i need a rest

  4. Display NameMEMBER

    Booming prices are not their problem, but lets see if they are of the same view when prices fall…

    • happy valleyMEMBER

      Wasn’t there some talk of the RBA wanting to shut down the house auction market last year, when COVID first hit as they were scared of house price falls?

    • Jumping jack flash

      house prices falling would be a systemic risk for the banks when 60% or more of their total loan books are attached to property values.

      LVR, the only measure of risk considered these days.

  5. Lord DudleyMEMBER

    Given that there are two investment classes in Australia (mining and real-estate), and that the RBA Board members probably avoid owning too much mining to avoid the appearance of a conflict of interest, I wonder how much real-estate the members of the RBA Board own?

    Australian housing is too big to fail. I recommend that all other economic sectors in Oz aside from mining be shut down (or in the case of agriculture, sold off) in order to free up more capital for housing. This will help guarantee continued success. Success that can be used as an excuse to maintain lax lending standards, because the asset class is so safe, because all of the capital has been invested in it.

    Buy more houses. You’ll be rich!

  6. DingwallMEMBER

    He also noted that unemployment would be higher if the RBA prematurely increased interest rates in an attempt to curb rising house prices

    When all your employment eggs are in one basket of course unemployment would be higher. Now if only our economy was diversified ………………………

    • Jumping jack flash

      And of course there is that direct link between employment and the price of debt…

  7. Jumping jack flash

    Silly people!
    Rising house prices aren’t a concern for the RBA and none of their business, but falling house prices are a catastrophe. Its because of all the debt attached to them.

    Its that simple.

    Houses have done their job now to saturate the people with debt and make debt absolutely necessary to obtain for routine purchases that should never need to be made using debt. If you’re going to fill a bath with water, you choose the largest container you can lift. If you want to fill an economy with debt, you choose the largest container to fill with debt that most people are able to “lift”.

    Anyway, house prices are a bit of a distraction. The RBA is most interested in CPI and wage inflation, and if not they should be. These are the keys to the next leg up for debt.

    They should also be lambasting the government for their lacklustre attempt at raising CPI. Simply pathetic, and there’s not likely to be any other opportunity to pull it off now without attracting negative attention from the rest of the world.

    • It’s worth remembering that so far Aussie households have done exactly what the RBA expected them to do (step by step interest rate cut by interest rate cut the two policies are in perfect synchronization) Given this why wouldn’t the RBA be proud of itself and be somewhat cocky to boot.
      It won’t be game on until the parties fall out of lock step, at which point it is anyone’s guess as to what unravels first. Maybe the Confidence fairy steps out the door one day and walks straight into a king-hit or maybe bit by bit average people lose what respect they still have for our central bank
      Until now I always expected the bad news to be delivered by a sudden blowout in the balance of payments followed by a credit freeze and an AUD liquidity crunch….that didn’t happen because the RBA does seem to have managed this contagion…. kudos RBA.

      • Jumping jack flash

        Yes.
        House prices are just a symptom of the economy of debt though.

        Interest rates were systematically cut to try to stimulate debt growth and make it easier for the low debt growth to kick off perpetual debt. They failed each time, but to be fair they had the headwind of CPI suppression policy – high immigration and wage theft.

        Stimulating debt growth was necessary each time the debt ceiling was reached, and debt growth stalled. Stalling debt growth results in deflation. Nonproductive debt is inherently deflationary due to the interest. Something like 100 billion dollars of interest just for all our mortgages is extracted out of the economy every year and handed to the banks to pay for debt that does nothing to assist raising this money, except by its own growth. So if the debt growth isnt enough to cover the interest, this interest needs to be paid out of productive money that would otherwise be used for consumption and paying for CPI and wage increases.

        A government that was blind to what was going on and didn’t care to learn kept up CPI suppression for no reason other then a fear of rising interest rates, even though when fearless Phil took over from captain Glenn, one of the first things he did was make it obvious that (CPI) inflation would be ignored as far as interest rates went.

  8. “It is important to remember that while housing prices may not rise as fast without the monetary stimulus, unemployment would definitely be materially higher without the monetary stimulus.”

    The certainty that moving rates from 2% to 0.1% saves jobs is not clearly established. Sure that is economic orthodoxy, but it is that orthodoxy that has got us into this trap. The effect on asset prices of pushing interest rates to almost zero is clear and direct.

    What jobs were saved via monetary stimulus?

  9. FUDINTHENUDMEMBER

    Lol hold on.. So after the mining boom they weren’t dropping rates to support housing/construction and do the whole wealth effect hoohaa?

    As per the RBA:

    “The wealth channel: A reduction in interest rates stimulates demand for assets, such as equities and housing, raising the prices of these assets. This occurs because the reduction in interest rates increases the present discounted value of the asset’s future income flows.”

    https://www.rba.gov.au/publications/bulletin/2017/sep/1.html#:~:text=The%20wealth%20channel%3A%20A%20reduction,the%20asset's%20future%20income%20flows.

    So is house prices in yer wheelhouse or not Debelle? Certainly seems like it..

  10. Cynical snake

    SUPPLY.
    That is what the RBA means should be tweaked re: house prices. Or at least should if a fair go for all is the ideal.
    Tweaking credit just changes the price people miss out at, not the number of people that are missing out.
    Supply is so far beyond the RBA’s purview it’s not funny but is what should actually be addressed to solve the problem.

  11. Doesn’t the RBA buy RMBS as part of its funding facility?
    At the same time the banks are borrowing from the RBA at 0.1% from the Term Funding Facility in order to hand out mortgages like candy?

  12. Even StevenMEMBER

    Leith – you have it a little wrong. APRA would employ MP on the instruction of council of financial regulators (chaired by RBA). RBA has no interest in doing so because it wants to juice the economy as much as possible.

    It follows that removing separation of RBA and APRA will do nothing so long as RBA’s current thinking prevails.

    Would it force RBA to own the bubble? Perhaps. Would it cause them to change their mind and lean against property prices? Unlikely.

    There is too much political pressure to see property prices go up.

  13. You might increase jobs by lowering rates, but people need to work more to pay off that debt. Avoiding recession vie loose money now means hundreds of thousands of households have borrowed a personal depression for the next 40 years to pay off a ludicrous mortgage. Monetary policy at its heart is a zero sum game, some one wins at anothers expense. Given policy has been one way for the past 20 years we can see why the wealth divide is so wide and getting wider.

    • Jumping jack flash

      Debt repays itself if it grows at the correct rate. Or rather, debt repays its own interest. Repaying debt principal is deflationary.

      All that is required is wage inflation to enable the correct rate of debt growth.

      The same set of assets can be exchanged infinitely for larger piles of debt each time. This is called “capital gains”. Who doesn’t use an enormous pile of debt to buy a house any more?

      The parameters to enable this system of perpetual debt is wage inflation, and wage inflation is paid for by CPI. Debt does the rest, and the asset of choice to attach all that debt to is houses – the largest container available for the average consumer to fill with debt.

      It is essentially a very simple system, and when considered, it explains all the policy over the last decade. Wage theft was a poor imitation for wages growth backed by CPI, and a terrible mistake which was made by a government who doesn’t really understand what they’re doing, and doesn’t care enough to learn.