Why the Reserve Bank and the government are not in the mood to curb house prices in a booming market


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Get out the lifeboats and get ready for a river of crocodile tears over the next few months as we prepare for a federal election.

It has become a sort of ritual. Every three years, housing suddenly becomes a hot political issue.

We will, no doubt, hear pledges from both sides – to help first-time homebuyers through grants, handouts and other grants.

The problem is, generally this tends to make affordability worse. Throwing money at first-time buyers only increases prices and instead becomes a subsidy for those who sell their property.

If we learned anything from last week, the Australian real estate market is on a one-way trajectory in space and no one – neither the Reserve Bank through monetary policy, nor the government through monetary policy. tax reform – is not in the mood to change its course.

The June quarter saw the biggest quarterly increase in home values ​​in the nation’s capital since the Australian Bureau of Statistics began collecting data almost 20 years ago, with 6.7% average growth.

With official interest rates likely to stay close to zero for the next three years, the weight of money and easy lending are expected to continue, further fueling the frenzied demand for real estate.

And again, investors are coming back to the market, crowding out new entrants.

You go. No you go

The treasurer said the Reserve Bank had not been able to meet its key inflation and wage targets.(

PAA: Lukas Coch

)

Relations between our two main economic management arms – the Reserve Bank of Australia and the Federal Government – seem a little icy at the moment. And neither seems willing to take responsibility for the incredible real estate spike, or take steps to control it.

Last week, Treasurer Josh Frydenberg agreed that it might be wise to conduct a review of the Reserve Bank, given that it still has not met its key inflation and wage targets in the over the past five years, although he admitted that it had “worked very well”. through this crisis “.

The idea of ​​a review was launched a report of the Organization for Economic Co-operation and Development – now overseen by former Finance Minister Mathias Cormann – on the Australian economy and follows widespread criticism that the RBA kept rates too high before the pandemic.

Later in the day, RBA Governor Philip Lowe, in a speech on how the economy was doing through the latest wave of COVID infections, pushed back on suggestions that interest rates should be raised to cool the searing housing market.

Higher interest rates, he said, would certainly help bring house prices under control. But it would come at the cost of “fewer jobs and lower wage growth”.

Home loans in Australia

Verrender column chart mortgage loans

The graph shows the incredible amount of cash banks are currently lending for housing, which explains the recent insane price hikes. And it’s clear that investors are back in the game, drawn to the smell of easy capital gains.

Last week, however, the idea of ​​macro-prudential controls was not even mentioned.

Real estate is exploding

A black and yellow residential real estate sign showing six homes sold and the title The Power of Place.
A residential street in Brisbane saw six homes sold by the same agent in 30 days earlier this year.(

ABC News: Jason Dasey

)

There is an inconvenient truth about housing affordability. While politicians love to spend money during elections, there are only two effective ways to make housing more affordable – and neither come without a hitch.

Either house prices need to come down, which can hurt the economy and wreak havoc on the banking system, or wages need to rise faster than real estate, which can spark inflation and cause rates to rise. of interest.

The RBA is betting on the second option; that its ultra-low interest rates will stimulate job and wage growth. But it’s hard to see how that will work on its own, without the brakes being applied to real estate investors or real estate loans in general.

Then the kicker. Housing problems have largely been caused by factors other than monetary policy and need to be addressed elsewhere.

“Factors include: the design of our tax and social security systems; planning and zoning restrictions; the type of housing that is built; and the nature of our transportation networks, ”said Dr Lowe.

In case you missed it, he was talking about government. If he needed backup, it was in the same OECD report.

Negative debt and the 50 percent capital gains tax cut had skewed investment decisions, he found, and encouraged Australian households to get into real estate.

The final result ? Our household balance sheets are far too heavily exposed to real estate.

Beautiful feelings. But there are only two chances that these tax incentives will be removed soon. None and Buckley’s.

No tax reform … no control of the RBA

Philip Lowe looks at the camera, with a blurred podium in the background.
RBA Governor Philip Lowe has decided not to raise interest rates to cool the housing market.(

ABC News: John Gunn

)

The last federal election dealt a fatal blow to any possibility of property tax reform. With so many Australians so exposed to real estate – ATO figures suggest more than 2 million Australians own investment property – the opposition’s policy to cut tax incentives has become an issue. easy target for a desperate government looking for an advantage.

After being crushed in the elections, the ALP has since abandoned its property tax reforms, never to be resumed. This means that the tax incentives are here to stay. And that means investors will continue to invest money in residential real estate, pushing up prices.

Which leaves the ball in the RBA’s court. While Dr. Lowe has rejected rate hikes to tame the market, there are other measures available to our money mandarins.

As a key member of the Board of Financial Regulators, the RBA played a decisive role in bringing real estate investors in line a few years ago. And if he decided that soaring house prices were a threat to economic stability, he could do it again.

Balaclava property auction, Melbourne, April 2018.
Low-interest home loans have fueled the Australian real estate boom. (

ABC News: Stephen Letts

)

The banking regulator, APRA, which is also on the council, could be tasked with curbing bank lending for real estate. It might require larger deposits. Or limit the amount of interest-only loans that banks could give, as they did four years ago.

For years, the RBA has rejected the use of these types of measures – known as macroprudential controls – arguing that they don’t work. But regulators were forced to adopt the measures twice, between 2014 and 2018.

As you can see from the graph, they worked with devastating efficiency. In 2015, investors came close to the homeowner eclipse on mortgage loans. But limits on bank lending to investors and interest-only lending, the most popular type of lending to investors, forced a sharp turnaround.

Many critics of the RBA tend to ignore its unique charter and obligations. Most central banks have only one role; to control inflation.

The RBA, on the other hand, has three mandates, each gigantic, which can run counter to each other. It must somehow maintain the stability of the currency (by ensuring that inflation is between 2 and 3 percent), contribute to full employment and ensure the prosperity and well-being of all. The australians.

Housing has become a hotspot for our economy, so you could argue that this falls under the RBA’s third term. But if it pulls the interest rate lever to blow into housing, it will have an impact on its performance on the first two.

And if it is to be investigated on its performance, it is likely that it will stick to a strategy that will allow it to fulfill its core mandates. Clearly, he believes it is up to governments to do something to reduce tax incentives for property while focusing on inflation and wages.

The final result ? All hands free when it comes to property.

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About Christopher Easley

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