News & Current Affairs
08 April 2015
by Mark Kenny
Reserve Bank puts house prices over jobless by keeping rates on hold
Fear of fuelling the Sydney and Melbourne real estate markets appears to have trumped hope for job-seekers and borrowers across the nation with the Reserve Bank leaving the official cash rate on hold in April rather than opting for cheaper credit to spark a new round of hiring.
But a rate cut has now become almost certain in May - just before the federal budget - after the RBA listed the pre-conditions and backed specific efforts through tougher regulation designed to "contain" house price growth being inflated by prospective landlords.
"Growth in lending to investors in housing assets is stronger than to owner-occupiers," RBA governor Glenn Steven said in his monthly statement.
"Dwelling prices continue to rise strongly in Sydney, though trends have been more varied in a number of other cities. The bank is working with other regulators to assess and contain risks that may arise from the housing market."
The decision suggests the RBA has put containing real estate speculation ahead of trying to kickstart other investment in an economy it acknowledges is weak, in order to get firms hiring.
"Growth is continuing at a below-trend pace, with overall domestic demand growth quite weak as business capital expenditure falls," Mr Stevens said.
"As a result, the unemployment rate has gradually moved higher over the past year. The economy is likely to be operating with a degree of spare capacity for some time yet."
Capital markets had largely priced in a cut of another 25 basis points to a new record low of 2.0 per cent on Tuesday, because analysts were convinced that the triple indicators of low inflation, a jobless rate of 6.3 per cent - which is markedly is higher than at any time during the GFC - and continuing below-trend economic growth justified intervention.
But the central bank instead stayed its hand, amid fears the Sydney residential market - and to a lesser extent Melbourne's - is already over-heated, and that cheaper funds would add to demand and push prices even higher.
That mostly Sydney-specific problem has now also become the nation's problem and has sparked calls for a new "macro-prudential" regulation to prohibit retail banks from lending more than a set percentage of the purchase price of a residence which won't be owner-occupied. Advocates say this would curb demand from investors who tend to borrow a greater proportion or in some cases all of the purchase price, aiming to service the debt through rental income and negative gearing.
Deloitte Access Economics director Chris Richardson has backed the use of such a rule as a way of taking the heat out of the Sydney market while allowing the RBA to use monetary policy to protect the wider economy.
"You want an RBA that is willing to throw the interest rate shield when the circumstances require it," he told Fairfax Media.
"The policy of least regret is to have a central bank that doesn't have to look at the rear view mirror when it's time to act," he said, referring to the risk of cheaper money adding to the Sydney bubble.
"The tricky thing for the Reserve Bank is it's got one lever, but it's worried about two things that are pushing it in different directions - it's worried about an economy that is just chugging away ... but it's also worried that Sydney and Melbourne house prices have got ahead of themselves and not soon, but at some stage, that could cause problems."
Mr Richardson said limiting credit to real estate speculators could provide authorities with those separate policy levers.
He said it was important to separate the two challenges of sluggish growth for the whole country, hit by collapsing iron-ore prices and a jobless rate edging upwards, from the entirely different issue of excessive real estate demand particularly in just one or two cities.
Stephen Koukoulas of the firm Market Economics acknowledged the situation was tricky for the RBA board but described the decision to stay on the sidelines as "odd" given that the unemployment rate has been running above 6 per cent for much of the past year, whereas wages growth has been a record low.
"House prices win over unemployment," he said.
Mr Koukoulas said the suggestion of a macro-prudential ruling to limit lending to investors was long overdue, arguing it would free up the RBA, and would be reviewable in 12 months to see it if it was working as intended.
While economists were divided over the prospect of another reduction in April, markets sent the dollar higher on the news.