Cooling a hot market
Should the RBA be involved in cooling a hot market? Image – Canva.
  • With higher house prices shutting young people out, what will be done to cool the market?
  • A new report argues that central banks should consider house prices in their mandate
  • However, much of the recent commentary goes against this call

With rising house prices shutting many young people out of the market, debates about what to do to fix this problem are in the spotlight.

Calls to abolish negative gearing to reduce investor demand, relaxing planning regulations to increase supply, and allow Aussies to access their super early to buy a first home, are among the options that have gained some attention of late.

The recent recommendation from a new report that looks to change central bank policy has been a less widely discussed issue, however.

The costs of a booming market

Going against much of the recent commentary on monetary policy, a new landmark report says the Reserve Bank of Australia (RBA) – plus a Royal Commission – should address the effect of soaring house prices on productivity and economic stability.

It also argues that all levels of government should collaborate to expand the housing supply and infrastructure needed to support it.

The UNSW report to the Housing and Productivity Research Consortium, titled ‘Housing: Taming the Elephant in the Economy’ interviewed a panel of 87 experts and undertook an extensive review of national and international literature.

Australia’s house prices have risen by 10% over the past year (to April 2021) and are forecast to increase a further 10% and 14% over the next 12 months.

The report stresses the importance of intervening to stabilise the market, with housing stock valued at an estimated $8+ trillion and housing construction accounting for 5% of all Australian jobs.

The report’s lead author, Prof Duncan Maclennan, said the review confirms Australia’s housing system is not working for the economy and an immediate overhaul is required.

“Australia’s approach to housing policy has fueled income and wealth inequality and created significant economic instability. This is a huge drag on productivity and warps Australia’s capital investment patterns,” Professor Maclennan argued.

A key point of contention was this statement from Professor Maclennan:

“The responsibilities of the RBA need to be expanded to include maintaining a more stable, rational housing market.”

The RBA’s not for turning

This view goes against much of the commentary on monetary policy. Just today in his latest speech, RBA Governor, Philip Lowe was again adamant that Australia’s central bank “does not, and should not, target housing prices.”

Over in New Zealand, the national government recently told its central bank to consider the impact on housing when it sets monetary policy. However, the Reserve Bank of New Zealand (RBNZ) refused, with the Governor, Adrian Orr, stating, “Adding house prices to the monetary policy objective would be unique internationally, which could make monetary policy less effective and impact financial market efficiency.”

Many commentators have argued giving central banks the responsibility to consider house prices in its mandate would have disastrous consequences, sacrificing their ability to meet other mandates such as full employment and consumer price stability.

A recent op-ed from the Tokyo’s Bureau Chief, Robin Harding in the Australian Financial Review (AFR) pointed out that if central banks did try to stabilise house prices through raising interest rates, this would cause higher unemployment and lower economic growth.

Another article in the Wall Street Journal argued similarly, saying: “How much should a central banker weigh the rental price of one- and two-bedroom apartments and houses in popular cities when setting an interest rate that applies to every homeowner, home buyer, renter, manufacturer and farmer in the country?”

Mr Harding’s solution was simple, reflecting the current calls for action for state governments: “cut planning regulations and let people build more houses.”

The Brookings Institute, arguably one of America’s most prestigious think tanks, is also in agreement. In a recent piece titled, ‘Why is the New Zealand government telling its central bank to focus on rising house prices?’, the authors point out that this debate is not new: in fact, as early as 2000, the second Geneva Report on the World Economy was titled “Asset Prices and Central Bank Policy.”

They conclude that ultimately, macroprudential tools should be utilised to deal with potential housing bubbles as opposed to hiking interest rates.

This is the current direction the RBA is taking.

With investors returning to the housing market, the central bank emphasised that they are monitoring lending standards closely to ensure they do not deteriorate. If this were to be the case, then, and only then would the Australian Prudential Regulation Authority (APRA) intervene with macroprudential tools to cool the rapidly heating housing market.

Note that this is not necessarily because of house prices in isolation (in fact, the chairman, Wayne Byres said they are not about to impose new lending restrictions in face of rising house prices), but only if an increased amount of borrowing poses widerspread instability to the financial system.

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