The media-preferred explanation for yesterday’s Reserve Bank decision to stay its hand on another interest rate cut emerged quickly: Sydney house prices 1, the rest of the economy 0. If it wasn’t for the greed of Sydneysiders and their ridiculously expensive houses, the rest of us could have had a rate cut. Instead, we’ll have to wait until … well, four weeks. Meanwhile, someone should do something about all that lending for houses. Macro-prudential tools, anyone? Step forward economist Chris Richardson, presumably speaking ex cathedra, to give his support to more lending regulation.
(On a side note, is it just us or is Richardson even more ubiquitous in the media than normal at the moment? When does he ever get time to lend his name to all those “independent modelling” reports his firm churns out? Or has he developed Chris-Richardson-quote-generator software for select media outlets to use? Just push Ctrl-F1 and out pops “we need to get the budget deficit under control” or “the mining boom is about to end”).
Except the explanation is a lot more complicated than how it’s portrayed in the media. For a start, low interest rates aren’t just benefiting Sydney housing investors, and the level of housing lending is not the problem. RBA governor Glenn Stevens said yesterday in his statement “credit is recording moderate growth overall. Growth in lending to investors in housing assets is stronger than to owner-occupiers, though neither appears to be picking up further at present. Lending to businesses, on the other hand, has been strengthening recently.” Indeed, the growth in business lending is at its fastest rate in six years and is one of the emerging positives in the economy — something ignored by the media. And it has been gathering pace since well before the February rate cut.
And as Stevens noted, “the Bank is working with other regulators to assess and contain risks that may arise from the housing market”. In fact, the Australian Prudential Regulatory Authority wrote to the banks in December last year outlining its target areas in relation to lending — it would not be introducing any new regulation but examining areas like lending standards for new borrowers, including their capacity to handle higher interest rates, the level of higher-risk lending and the level of growth in property investment lending.
APRA is now analysing the data it has got from inspecting the home-lending books for all lenders and deposit takers in the housing sector. Those inspections happened last quarter, so we can expect an APRA statement in the next six weeks or so. Meanwhile, those demanding macro-prudential controls on home lending might consider the situation in New Zealand, which is often cited as the exemplar for such controls. The Kiwis introduced tougher rules aimed at controlling riskier, loans involving high loan-to-valuation ratios (in other words, lots of debt, little or no equity), but then they were forced to relax them for high LVR lending for new home construction. And guess what they now have — a home construction boom and rapidly rising prices in the riskiest market in the country, Auckland.
To the extent that “dwelling prices continue to rise strongly in Sydney” may have been a factor in discouraging the RBA from making its planned downward move yesterday rather than in May (just before the budget, which, on current indications, isn’t going to do much of anything except try to get more parents with young kids into work), it leads us back to the basic problem of housing supply in Sydney, and the systematic failures at the Commonwealth, state and local level to provide sufficient and correctly located housing stock across our largest demographic and economic region, despite the surge in building prompted by low interest rates.
That is, we have a multi-speed economy — remember that from the mining boom? Except, this time the beneficiaries are ordinary householders selling their properties and the NSW state government that collects stamp duty, rather than shareholders of multinational mining companies and the Commonwealth and state governments that collect corporate taxes and royalties.
But if you really do believe that the Sydney housing market is an impediment to growth across the rest of the economy, the solution isn’t the easy one of APRA arbitrarily imposing some macroprudential regulation on property investment lending that will be a panacea for Sydney house-price growth. It’s the much harder solution of removing impediments to housing supply and removing the distortions of our tax system that encourage investment in housing. That needn’t even involve ditching negative gearing — how about removing the capital gains discount and restoring it to 100%. Remember it was the Howard government which cut it to 50%. Fiscal policy is the responsibility of the federal government, not the RBA or APRA. Joe Hockey could quite easily do it today or tomorrow, if he really wants to.