A brilliant editorial in the AFR today warning of financial stability risks from excessively easy monetary policy. It touches on the paradox I mention in the post below: we have near emergency monetary policy settings with economic growth above-trend over the last six months, a 5.1% unemployment rate, and a recent surge in house prices. A must read here:
The RBA’s decision yesterday to take its overnight cash rate to just 25 basis points short of the 50-year low of 3 per cent reached at the depths of the global financial crisis could stoke rate-sensitive house prices. Property developer Harry Triguboff of Meriton says he will start to borrow again on expectations that lower mortgage costs will spur demand for new apartments. The rise in housing prices should be seen as a worrying sign of future instability. Former Bundesbank president Axel Weber warned last week that artificially low interest rates and global quantitative easing could create housing market bubbles, and the International Monetary Fund noted that Australia’s elevated house prices were a “vulnerability”.
While the Reserve Bank says the economy was growing close to trend, unemployment is close to its natural rate and investment is tipped to remain strong over the next year or so, interest rates have now fallen to close to emergency levels. As returns on saving are so low, more overleveraged Australians may start questioning whether they should still be repairing their household balance sheets or instead begin borrowing again to invest in housing.
