So the plot thickens with the RBA. Do they think the housing market is a source of strength or weakness? According to one communication, it is clearly a source of comfort from a system stability perspective. According to others, it is a cause for future system stability concern. Perhaps the two are not mutually exclusive. The RBA would argue this point. But as I and many others repeatedly predicted a long time ago, the RBA's newfound desire to attract attention to asset prices is confusing markets as to what this means for monetary policy. The truth is nobody, including the RBA, really knows. They are in unchartered territory. The last time a central bank tried to manage asset prices (ie, the US Federal Reserve tightening monetary policy in the 1920s to choke a booming sharemarket), many fine economists, including Keynes, Friedman, and Bernanke, concluded it triggered the Great Depression. The bifurcation as to the RBA's intentions is reflected in Dow Jones's reporting:
"Economists are almost split down the middle on whether the Reserve Bank of Australia will again tighten policy next week, with only a bare majority expecting rates to be hiked by 25 basis points...
In a Dow Jones Newswires survey of 25 economists conducted Wednesday and Thursday, 14 said they expect the central bank to move the cash rate target to 4.25% when the policy setters gather Tuesday.
These views are disconnected from interest rate traders, who have priced in a 66% chance of a hike through the interbank futures market, albeit down from 75% Wednesday."
On the subject of the RBA's approach to communication, Dr Stephen Kirchner of the CIS has today added further weight to mounting disquiet (see also Bob Gottliebsen).
The short story is that people don't know what the RBA really thinks. The RBA's Financial Stability Review (FSR) clearly stated that from a "system stability" perspective, which is the only reason why the Governor thinks the RBA should be focusing on asset prices more so than they have in the past (ie, because of the risk of coincident asset price and credit busts impacting the real economy), the housing market is presently a source of comparative comfort. For the avoidance of any doubt, I confirmed this position with the folks at the RBA.
In fact, the FSR projected far greater concerns about commercial real estate and business credit (first page, second column), which have historically been the most significant sources of instability for the Australian economy.
Back in 2008 and 2009 we had the RBA enthusiastically defending the integrity of housing market conditions and casting doubt on the many predictions for steep price falls.
More recently, the RBA has expressed considerable anxiety about the supply-side (belatedly) and the difficulties developers have getting credit. The reason developers have had trouble getting finance is because lenders have been, in the RBA's view, unnecessarily concerned about house price "bubbles" and the risk of insufficient demand (ie, falling prices that would kill their collateral protection). That RBA has characterised this as lenders being unreasonably "risk-averse".
So while the Governor and Phil Lowe have been jawboning house price inflation under the pretext of system stability, the FSR affords a conflicting impression. Of course, the RBA might argue one (the FSR) offers a lens on current circumstances, while the other (crude jawboning) is directed years into the future.
What is problematic here is that the Governor and Lowe's statements are only going to seriously spook lenders. Let's be clear. Rightly or wrongly (the RBA has repeatedly gone on the record to say "wrongly"), every credit officer in the country thinks the RBA believes Australia is suffering from a house price bubble. (We even had the Chairman of NAB criticising CBA and Westpac for ramping up mortgage finance on similar grounds.) We saw the headlines on the front pages of all papers this week: "RBA worried about bubble risks" etc. So these statements are only going to exacerbate the supply-side problems, which, frankly speaking, are more serious than a few mums and dads getting overexcited. Ironically, rising prices are the best possible thing to stimulate investment in new housing supply. This is, after all, what free markets are there to do--signal where scarce economic resources should be allocated via the price mechanism.
The bottom line is that the RBA could probably be a little more thoughtful about these communications. If you are going to express concern about asset price appreciation, couple that with statements to the effect that you think the fundamentals are strong. And balance out your housing market commentary with observations along the lines that gearing heavily against risky shares is also a bad idea, and that you are more concerned (currently) with things like commercial real estate and companies from a stability perspective.
It also pays to remember that property "investors" provide rental accommodation for lower income families. According to the RBA, rental vacancy rates are currently very tight. So surely we want to be encouraging, not discouraging, investment in new rental shelter?
Finally, if people are going to argue that fundamentals-based house price rises are bad for society, they also have to explain to us why rising share prices are a bad thing too. Rising house prices simply reflect an increase in the value of assets that supply 10.9 million Australian workers with shelter. It is usually the market signaling that we need more investment in shelter, because we are currently short supply. Likewise, the rise in the value of a company that owns, say, agricultural assets that produce food for us to consume (food and shelter are the two essential inputs for a functioning economy), or, say, commercial properties that offer accommodation for businesses, reflects an increase in the market value of its assets (for a range of possible reasons ultimately relating to demand and supply). If you do not get what I am saying here, read this very clear explanation on the role that housing assets play in our economy.
For clarity's sake, I am a big opponent of individual consumers gearing heavily into residential property or shares, which, contrary to popular opinion, have similar levels of risk at the individual asset level. It makes little economic sense. I have argued longer and harder than anyone in this country that we need to deleverage household balance-sheets and elastify the supply-side. But when seeking to achieve multiple objectives one runs the risk of accomplishing none. The RBA should bear this in mind.
Anyhow, this is what Dr Stephen Kirchner of the CIS had to say on the subject:
"Reserve Bank Governor Glenn Stevens granted an unprecedented interview this week to a rather star-struck David Koch of Sunrise. In contrast to his predecessor, who never gave an on-the-record media interview during his 10 years in office, Stevens has made a concerted effort to get out more. He has given public speeches at around twice the rate of his predecessor, recognising that effective communication is essential to managing inflation and inflation expectations.
Stevens’ comments on house prices during the interview were widely seen as an attempt to ‘jaw-bone’ the housing market, but this is a risky strategy. For a start, his comments sent mixed signals. While questioning whether property was the ‘guaranteed way to prosperity,’ Stevens also questioned whether housing would be affordable for future generations, implying that house prices will continue to rise. If the public expect that housing will become even less affordable in the future, that belief could further fuel current demand.
His comments might also lead the public to believe that the RBA is targeting house prices, resulting in it being held responsible for developments in the housing market that are largely outside its control. There is little the RBA can do about supply-side constraints on housing other than to use its influence to highlight the problem. Stevens would be well aware that tackling house price inflation from the demand side with higher interest rates would not address the underlying problem of too few houses. Responsibility for housing affordability should be laid firmly at the feet of politicians.
Central banks have never ‘ignored’ asset prices, as some commentators now claim. Alan Greenspan said in his famous 1996 ‘irrational exuberance’ speech that ‘we should not underestimate or become complacent about the complexity of the interactions of asset markets and the economy. Thus, evaluating shifts in asset prices must be an integral part of the development of monetary policy.’ Monetary policy should be based on a complete description of the economy, including asset prices, but central bankers should not be seen to be assuming responsibility for house prices at the expense of consumer price inflation."
