27 September 2023

RBA sticks to policy: Won’t bow to the housing market

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Michael Janda and Gareth Hutchens* say Reserve Bank governor Philip Lowe has issued a warning on the house price boom.

The Reserve Bank has issued its bluntest warning yet about the dangers of the latest house price boom, and the possibility regulators may step in to deflate it.

Speaking at the Australian Financial Review’s Business Summit, Mr Lowe confirmed that the recent rise in house prices across most of the country — to record levels in many areas — had been a topic of discussion at recent RBA board meetings.

In a veiled warning to home buyers, Mr Lowe cautioned that the prospect of lower population growth over the next couple of years could outweigh some of the other factors driving prices higher.

“There are many moving parts at present: record low interest rates; a shift in preferences towards houses and away from apartments; strong demand for housing outside our largest cities; large Government incentives for first-home buyers and home builders; and the slowest population growth in a century,” he observed.

“Time will tell as to how these various factors ultimately balance out, but history suggests that shifts in population growth can have large effects on the housing market.”

RBA will not raise rates to slow housing boom

Mr Lowe reiterated that the RBA does not, and would not, explicitly target house prices with its interest rate policy.

Instead, he said it was up to Governments and financial regulators to address community concerns about soaring housing costs.

“I recognise that low interest rates are one of the factors contributing to higher housing prices and that high and rising housing prices raise concerns for many people,” he said.

“There are various tools, other than higher interest rates, to address these concerns, leaving monetary policy to maintain its strong focus on the recovery in the economy, jobs and wages.”

Some of those tools would include Government policy changes, such as reducing the currently favourable tax treatment of housing relative to some other types of assets and income sources, while others could include so-called macroprudential policies.

These are the types of lending limits that were imposed by the banking regulator during Australia’s most recent home price upswing, which was centred in Sydney and Melbourne, and peaked a few years ago.

In a thinly veiled warning to the home lending sector, Mr Lowe said the Council of Financial Regulators, of which the RBA is a member, would intervene again if it felt that banks and other institutions were making risky loans.

“The Council of Financial Regulators has indicated that it would consider possible responses should lending standards deteriorate and financial risks increase,” he said.

“We are not at this point, but we are watching carefully.”

Full employment?

Mr Lowe has also waded into the debate about “full employment”, saying he acknowledges there is some uncertainty about what constitutes full employment in Australia’s modern economy.

Full employment is widely considered by most economists to be the level of unemployment that leads to moderate wage growth and does not put excessive upward pressure on inflation.

The RBA governor agreed that, over the past decade, official estimates of where the level of full employment could be have been repeatedly revised downwards, both in Australia and overseas.

But he is sticking with the idea that Australia “can achieve and sustain an unemployment rate in the low 4s,” meaning he thinks an unemployment rate somewhere between four and 4.5 per cent would be “full employment” in Australia.

“We will be relying on the wages and prices data to provide a signal as to how close we are,” he said.

“The current signal is that we are still a long way from full employment.”

The national unemployment rate is currently 6.4 per cent.

Professor Ross Garnaut, one of Australia’s most respected economists, has recently criticised the RBA’s definition of full employment.

In his new book, Professor Garnaut said “an average of several hundred thousand fewer people were employed” in Australia between 2013 and 2019 than otherwise would have been possible.

He said the country’s economic authorities — including the RBA — have been allowing that level of unemployment to exist in Australia because it helps to suppress inflation and wages.

“This is voluntary unemployment — voluntary for the Reserve Bank, because it is unemployment that the Reserve Bank chooses to allow,” he wrote.

He said policymakers should stop guessing where full employment could be, and instead return Australia to genuine full employment — an unemployment rate of 3.5 per cent or lower, which would be the lowest it has been since the early 1970s.

“We can find out where it is by increasing demand for labour until wages in the labour market are rising at a rate that threatens to take inflation above the Reserve Bank range for an extended period,” he wrote.

“Certainly, it is lower than the ‘well below six per cent’ that Treasurer Josh Frydenberg said would trigger efforts to reduce the budget deficit.”

Business investment

Mr Lowe said Australia’s economy had recently enjoyed a strong rebound in consumption (with growth of 12 per cent over the second half of last year), but business investment had failed to match it.

He said machinery and equipment investment picked up encouragingly in the December quarter but, overall, business investment was more than 10 per cent below where he thought it would be at the start of last year.

“Non-residential construction is especially weak, with the forward-looking indicators suggesting this is likely to remain so for a while yet,” he said.

“This weakness in business investment follows a run of years in which non-mining business investment as a share of nominal gross domestic product (GDP) was already low by historical standards.

“Since 2010, this investment ratio averaged 9 per cent, compared with 12 per cent over the previous three decades.”

He said there was no “magic ingredient” for boosting business investment, but it would help if demand picked up.

“A good starting point … is businesses having confidence that the economy will grow and that there will be demand for their products and services,” he added.

Bond-buying program

Mr Lowe also said the RBA board would consider later in the year if there was a case for another extension of its bond purchase program.

“We are prepared to undertake further bond purchases if that is required to reach our goals,” Mr Lowe said.

“Until then, we remain prepared to alter the timing of purchases under the current programs in response to market conditions.

“We did this last week when liquidity conditions deteriorated and bid-asl spread widened noticeably, and will do so again if necessary.”

The Reserve Bank is currently targeting a three-year Commonwealth Government bond rate of 0.1 per cent and also seeking to put downward pressure on longer term bond interest rates.

Currently, the bank is targeting that 0.1 per cent rate on the bond that matures in April 2024, but it is considering whether to move onto the next bond, which matures in November 2024, effectively extending the period of ultra-low rates.

“The board has not yet made a decision on this question and will consider it again later in the year when it has more information about the economic recovery and the labour market,” Mr Lowe added.

*Michael Janda has been the ABC’s Online Business Reporter since 2009. Gareth Hutchens is a business and economics reporter based in Canberra.

This article first appeared at abc.net.au.

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