It’s not only soaring house prices in Australia’s southeastern capitals that are creating affordability concerns right now. They are also holding back the Reserve Bank of Australia from cutting rates, despite some valid arguments for adding additional monetary policy stimulus to the economy.
Addressing the House of Representatives Standing Committee on Economics in Sydney earlier today, RBA governor Philip Lowe said that while there were arguments for lowering interest rates to help lift economic growth, there was a view it would only push up household borrowing and house prices.
He noted there was a “counter-argument” that rate cuts “would probably push up house prices a bit more, because most of the borrowing would be borrowing for housing.”
He said: “While that would have some positive effect on the economy, the issue we are dealing with internally is how that would add to fragility.
“Household debt is at record levels. Is it really in the national interest to get a little bit more employment in the short term at the expense of encouraging that fragility?”
That’s a telling statement, particularly at a time when underlining inflation remains firmly entrenched below the bank’s 2-3% target, with underemployment near record highs while wage growth sits at record lows.
While there are other considerations for monetary policy settings, it’s easy to see how some will interpret that message as a sign that the Sydney and Melbourne property markets are preventing the RBA from stimulating other areas of the economy right now.
With the debate over housing affordability intensifying in recent months, Lowe weighed into the political debate over the role of investors in pushing up house prices, telling the committee that altering the interaction between negative gearing and capital gains tax would “take some heat out” of the housing market in the short-term.
The Labor party has proposed abolishing negative gearing for property investors, an idea dismissed by the Coalition government which has defended negative gearing as a way to allow middle income earners to benefit from a strong housing market.
The Australian Financial Review recently reported that the federal government was considering winding in capital gains tax concessions to property investors.
This was later denied by government ministers, but it does go to show that the policy debate is live in Canberra.
Speaking to MPs today, Lowe acknowledged that things could be better, telling the committee that he’d like to see unemployment a bit lower and inflation a bit higher.
In his opening statement, Lowe said:
At its recent meetings the Board has been paying close attention to the outlook for inflation as well as two other issues: trends in household borrowing and in the labour market.
One of the ways in which monetary policy works is to make it easier for people to borrow and spend. But there is a balance to be struck. Too much borrowing today can create problems for tomorrow, because debt does have to be repaid. At the moment, most households with borrowings do seem to be coping pretty well. But the current high level of debt, combined with low nominal income growth, is affecting the appetite of households to spend, and we are seeing some evidence of this in the consumption figures. The balance that is required is to support spending in the economy today while avoiding creating fragilities in household balance sheets that could cause problems for the economy later on. This is also something we need to watch carefully.
Trends in the labour market are also important. As in the housing market, the picture in the labour market varies significantly around the country. Overall, the unemployment rate has been steady now for a little over a year at around 5¾ per cent. In a historical context this would have been considered a good outcome, although, today, a sustainably lower unemployment rate should be possible in Australia. The other aspect of the labour market that is worth noting is the continuing trend towards part-time employment. Over the past year, all the growth in employment is accounted for by part-time jobs. There is a structural element to this, but it is also partly cyclical. We expect that the unemployment rate will remain around its current level for a while yet.
In 2016, the median dwelling price in both cities rose by more than 13%, according to data from CoreLogic. Prices in Sydney have now doubled since the start of 2009, and have risen by over 80% in Melbourne over the same period.
Lowe added that he would not like to see household debt continue to rise relative to household incomes, saying that it was not in the national interest to create vulnerabilities in household finances.
He also said that supervision of lenders would likely be tightened further should investor credit growth keep accelerating after troughing in the early parts of last year.
In December, the value of housing finance issued to investors came in at $13.199 billion, up 20% on the levels of a year earlier, according to the ABS.
That mirrored housing credit figures from the RBA which surged by a further 0.8% in December, the largest monthly increase since June 2015.
That left annual credit growth to investors at 6.2%, well above the 5.6% pace of November. It was the fastest annual increase since March 2016.
Total outstanding investor housing credit currently stands at over $560 billion, more than double the $260 billion level just ten years ago.