The Reserve Bank of Australia has a word of advice for all homeowners: stop spending so much. As silly as that sounds, that’s exactly what the RBA’s deputy governor Philip Lowe suggested in a speech last night.
His warning follows yesterday’s news that consumer confidence grew by 7.8% in July. This came as a surprise to observers, because no one really knows why confidence rose. The last time it went up was in May. But that was on the back of a positive budget and rate cut.
But it looks as if the RBA is singling out homeowners in response to this.
Mr Lowe’s issue is with homeowners who rely on rising house prices to lift spending. The problem, as he points out, is that this behaviour also leads to rising household debt levels. And, as household balance sheets worsen, the idea is that they put the entire economy at risk.
Mr Lowe also notes that rising property prices increase economic risks and inequality. But is that the case? He’s right of course, but homeowners don’t make the rules. The RBA is responsible for cutting rates to record lows after all. And it’s the RBA who shoulder much of the blame for rising property values.
House prices don’t grow in unfavourable conditions. The mining boom helped lift the real estate market to new heights for the better part of a decade. But as the resource economy winds down, the RBA’s rate policy is primarily responsible for driving up prices. Low interest rates give banks too much leeway to lend freely to investors.
As for inequality, rising house prices do increase the gaps between the haves and the have nots. As property values grow, entering the market is out of reach for many households.
Property owners end up in virtuous circle too. As property prices rise, it gives them more confidence to spend, racking up debt in the process. Mr Lowe explains:
‘Given the position of household balance sheets, it is unlikely to be in our long-term interest for a consumption boom to be financed by a pick-up in household borrowing.
‘Ever-rising housing prices, relative to our incomes, do increase risks in the economy and are unlikely to make us better off as a nation. Rising housing prices are best matched by rising incomes.
‘This is something we continue to [be aware] of in the setting of monetary policy’.
There are two things worth picking out from that statement.
The first is that income growth is a good idea, but not one grounded in any reality. The latest ABS figures show wages in the July quarter grew at their slowest pace in 17 years.
It’s up policymakers to devise plans to lift household incomes. It’s all well and good talking about it, but there’s little they can actually do to fix the issue.
The second point is that Mr Lowe’s statement sums up the Reserve Bank’s stance on its rate policy to a tee. The only card the RBA can play is to lower rates again from the current, historically low, 2%. Yet the RBA knows that rate cuts would mostly lead to higher house prices. The economy might see a small uptick, but it’d be fleeting at best. Even though consumer confidence is up this month, rate cuts provide much less impetus for the economy than they used to.
The RBA is betting on limiting investment growth
The RBA can lecture homeowners on their balance sheets all they like. But as long as borrowing is cheap, investors will line up to join the growing ranks of property owners. And while capital gains remain favourable, there’s little pressure on homeowners to limit their debts.
It’s for this reason the RBA prefers to see housing investments dry up. That’s why they’re working with industry regulators APRA to limit lending to investors. APRA has, so far, played their part in pressuring banks to cut back on investment lending.
It’s requiring banks to hold more capital to back mortgages. The big banks responded by lifting interest rates for investors and interest only loans.
Mr Lowe left homeowners with one final piece of advice:
‘If [you] care about the future housing costs of [your] children then it’s possible that the higher expected future housing costs could exceed the capital gain, even though [you] own their own property’.
The scaremongering isn’t likely to work. The RBA needs to get back to devising ways to improve the economy. Otherwise homeowners will overlook the state of their balance sheets. And as long as house prices are rising, who can blame them? If policymakers can’t increase our wealth, then households are well within their rights to.
Contributor, Markets and Money
PS: In response to APRA demands, banks are limiting lending practices to investors. But that’ll only push up house prices in the future. Markets and Money’s property expert, Phillip J. Anderson, isn’t surprised by this.
He reckons house prices are set to boom over the next decade.
Phil’s 20 years of experience as a property analyst and advisor has given him a keen sense for where the property market is, and where it’s going. He predicted a housing market crash in 2008. He also went against the mainstream in 2009, saying house prices would go on to boom this decade.
He was right on both accounts.
In a free report ‘Why Australian Property is on the Verge of a Decade Long Boom’, Phil guides you through this coming decade. He’ll show you the right time to buy property at its cheapest, and how you can use this to time your investments. To find out how to download his free report, click here.