Regular readers will know that I like my central banking gossip. So here are some interesting curiosities for those square-eyed RBA watchers. First, in today’s Board Minutes the RBA makes the following remarks:
“The market for established housing had been very buoyant, with auction clearance rates at high levels, notably in Melbourne. Data for housing prices suggested that nationwide prices had continued to grow at a rate of close to 1 per cent per month in December and January.”
The “1 per cent per month” estimate the RBA refers to is, in fact, RP Data-Rismark’s Hedonic Index on a seasonally-adjusted basis. Given the consistent seasonality in house prices, we are, going forward, likely to start reporting seasonally-adjusted index data in addition to the traditional raw numbers (we have consulted the RBA on this matter and they agree that this would be a smart thing to do).
Second, I think it is interesting to note that Tony Richards started attending Board Meetings as a regular observer as of August 2009. Tony is Head of Economic Analysis at the RBA. This is not an unimportant development for RBA acolytes. My own guess is that Tony’s presence reinforces the fact that the RBA is constantly evolving its approach to monetary policy. It is clearly of the view that there is a role for the central bank to jawbone credit-fuelled asset pricing exuberance. And there is also evidently a school of thought that the RBA’s target cash rate can be employed to signal or ‘condition’, at the margin I would venture, the asset pricing environment. Guy Debelle has the equity and debt capital markets covered, which arguably pose the most risk to the banking system given their unpredictable volatility and much higher probabilities of default (on business and commercial real estate lending). And then Tony and his boss, Phil Lowe, presumably afford very granular insights on the residential real estate markets in addition to their standard macro commentary.
Here we know for certain that the RBA is spending a fair bit of time thinking about the supply-side of the housing market, which is one of Tony’s areas of expertise. The RBA would like to see supply-side rigidities relaxed. As Phil Lowe recently observed, the alternative will be very strong house price adjustments to balance demand and supply, which nobody really wants. Over and above the obvious elastification of planning restrictions and much needed increases in infrastructure investment, governments would do well to remove the many inefficient taxes that the industry that produces housing supply—namely builders and developers—gets slugged with by local and state government authorities.
Third, based on a quick scan of the RBA’s Board Minutes since late 2007 (I cannot search the PDF copies since they are images), the RBA first started canvassing house prices explicitly in the concluding ‘Considerations for Monetary Policy’ section in July 2009 (happy to be corrected on this). They referenced house prices a second time in the February Minutes. Specifically:
“Members took note of the positive developments in the financial sector, including early signs that credit to business was becoming easier after the difficult period last year. They also noted that, while housing loan approvals had slowed a little, house prices had gained significant momentum and were continuing to rise strongly for all but the bottom segment of the market.”
Finally, I think Rory Robertson has provided the best analysis to date of the 2002-03 episode that has been spun by the media into folklore as the RBA ‘pricking’ an incipient house price bubble. The RBA itself has been apparently keen to draw attention to this legend judging by recent parliamentary testimony. Rory offers his own dispassionate assessment, which I found very compelling (note excerpt only):
“The RBA’s back-to-back hikes in November and December 2003 were fast-tracked to limit the early-2000s boom in Australian house prices, or so the story goes…
Any fast-tracking of RBA rate hikes in late 2003, however, was marginal at most, in my opinion. The big picture at the time clearly was an economy growing rapidly with unemployment falling – that is, medium-term inflation risks were rising – partly in response to usually low interest rates. Today, that’s a standard macroeconomic reason for hiking.
In more detail, GDP back then grew at a 5.6% annualised rate over the two quarters to Q3 2003, with consumption running at a barn-burning 8% annualised rate. Full-time employment grew at a 5% annualised rate in the three months to September and October 2003. (Of course, these various ABS estimates will have changed somewhat from the original prints, but the data also were very strong at the time.)
In response to this rapid growth in GDP, demand and employment, the three-month-average unemployment rate dropped from 6% in August to 5.9% in September and 5.8% in October. Overall credit grew by about 16% annualised over Q3, up from around 10% in late 2002.
In short, the macroeconomic case for tightening in late 2003 was very strong. The economy was surging. Rapid demand growth, in part reflecting ongoing stimulus from unusually low interest rates, was driving unemployment lower and boosting medium-term inflation risks. The RBA always has plenty of discretion as to the timing of its moves but hiking rates in that situation was hardly a big call for “forward looking” policymakers, at least in retrospect.
Yes, house prices had indeed increased at a 19% annualised rate over the two quarters to Q3 2003, funded by housing credit growth in the 20-25% range. But that mainly was just another clear sign that the economy was booming, boosted by unusually low interest rates. You didn’t need to know anything about house prices to know the economy was booming.
Again, the extent to which rate rises in 2003 were “brought forward” or “additional” to what was needed on purely macroeconomic grounds is marginal at most. (The RBA’s statements at the time can be read at http://www.rba.gov.au/media-releases/2003/mr-03-17.html and http://www.rba.gov.au/media-releases/2003/mr-03-15.html ). Inflation had indeed remained low and stable in the two years to Q3 2003 - all eight quarterly readings for the trimmed mean CPI in that period were in the 0.6-0.8% range. )
I make the point simply because the myth of the RBA fast-tracking rate rises in 2003 tends to obscure the larger fact that the RBA actually oversaw very easy policy in the first half of the 2000s.
Indeed, if the RBA made a major policy error in the 2000s, it was the same one that it and many others have accused the Fed of making; that is, of keeping interest rates “too low for too long”.”
