The RBA is pretty chill about the house price boom they’re in the middle of creating.
The RBA is happy to let house prices boom.
That was the key take-away from the RBA Governors “game-changing” speech last week.
(Well, it was the key takeaway as far as I was concerned.)
Phil Lowe outlined a new paradigm for the RBA. Rates were going to stay lower for longer, they were going to provide banks with credit directly, and they were going to print money.
And, they weren’t going to make a fuss if all of this led to house prices booming.
(… which, if you’ve been reading my work for a little while, you’ll know is the inevitable result.)
The AFR was covering the new reality:
Little by little, ordinary investors are waking up to the realisation that a lasting legacy of the pandemic is that central banks will have no choice but to keep interest rates even lower for even longer.
And the corollary of ultra-low interest rates is that asset prices will move even higher.
Of course, this comes as no surprise to sharemarket punters. Indeed, the expectation that interest rates will remain at rock bottom for years has powered the spectacular rally in the US sharemarket, which has seen the S&P 500 index soar 55 per cent from its mid-March lows, despite lingering concerns about the strength of the economic recovery and the spread of the coronavirus pandemic.
But it is clear the prospect of interest rates remaining ultra-low has helped support local housing prices, even though Australia has weathered the most savage economic downturn in almost a century.
And with the Reserve Bank widely expected to decide at its board meeting next month to push its official interest rate even closer to zero and to launch a new program of buying long-term government bonds, it is scarcely surprising that governor Philip Lowe will have given close consideration to the likely effect on house prices.
Especially since Lowe has long warned that extended periods of ultra-low interest rates can encourage the development of dangerous and ultimately destabilising asset price bubbles.
In a speech last week, Lowe noted that he had closely examined the question of whether further monetary easing would be likely to lead to an increase in risk-taking that could potentially jeopardise financial stability.
But this had led him to quite a novel conclusion in the context of the pandemic.
Instead of undermining financial stability, it was likely that ultra-low interest rates could bolster economic activity and employment, thereby reducing the number of soured loans and improving overall financial stability.
“To the extent that an easing of monetary policy helps people gets jobs, it will help private-sector balance sheets and lessen the number of problem loans. In doing so, it can reduce financial stability risks,” Lowe argued.
“This benefit needs to be weighed against any additional risks as people take more investment risk in the search for yield.”
In some ways, this is not surprising.
Yes, the RBA has noted concerns before, but I think this is Phil Lowe saying, this is just not our job.
And it’s not. The RBA has a mandate for stable prices, full employment and currency stability. That’s it.
Housing booms are only relevant so much as they affect one of those three things, and the relationship is fuzzy at best.
No, it’s not the RBA’s job. It’s APRAs – the banking regulator – if it’s anyone’s. But even then, they’re only interested to the extent that housing booms affect bank balance sheets.
So in the absence of a housing boom minister, no one is getting paid to worry about housing booms.
Which means the RBA is free to pursue any medicine it likes, even if another housing boom is the side-effect.
And it will be.
And Phil Lowe is relaxed about it.