With the 2009-10 rate hikes neutralising the relief bequeathed by the RBA during the GFC, I thought the high-profile jaw-boning of prices by RBA officials was fraught with danger. Specifically, I warned that these actions could end up stifling the supply-side. I outlined this thinking in April 2010:
What is problematic here is that Stevens and Lowe's statements [about the cost of housing] are only going to seriously spook lenders. Rightly or wrongly every credit officer in the country thinks the RBA believes Australia is suffering from an unproductive house price bubble. (We even had NAB’s Chairman criticising CBA and Westpac for ramping up mortgage finance.) The headlines on the front pages of newspapers conveyed the story this week: "RBA worried about bubble risks".
It also pays to remember that property "investors" provide rental accommodation for lower income families. According to the RBA, rental vacancy rates are currently very tight. So surely we want to be encouraging, not discouraging, investment in new rental shelter?
Finally, if people are going to argue that fundamentals-based house price rises are bad for society, they also have to explain to us why rising share prices are bad too. Rising house prices simply reflect an increase in the value of productive assets that supply 10.9 million Australian workers with shelter. It is usually the market signaling that we need more investment in shelter. Likewise, the rise in the value of, say, farms that produce food for us to consume (food and shelter are the two essential inputs for a functioning economy) reflects an increase in the market value of its assets.
For clarity's sake, I am a big opponent of individual consumers gearing heavily into residential property or shares, which, contrary to popular opinion, have similar levels of risk at the individual asset level. It makes little economic sense. And I have argued longer and harder than anyone that we need to deleverage household balance-sheets [via greater use of “equity” as opposed to “debt” finance] and elastify the supply-side.”