The RBA is expecting property prices to boom. And they’re ok with that.
So the RBA got hit with a Freedom of Information request last week.
Journalists wanted to know what the RBA thought would happen with rates at such super-cheap levels, and funding being mainlined into the economy through such measures as the Term Funding Facility.
And what does the RBA reckon will happen?
Property prices will boom.
Yep. They reckon that house prices will rise 30% over the next three years!
This obviously isn’t the point of super-cheap rates. As the RBA notes in their internal document, their sights are firmly set on getting unemployment down.
But if the price of getting unemployment down is launching another epic housing boom, then the RBA’s ok with that.
If there’s a devil’s bargain to be had between unemployment and house prices, the RBA is willing to take it:
An internal RBA document released on Friday in response to a Freedom of Information request says the biggest risk to the economy was high unemployment, and that stronger household balance sheets from low rates could help counteract the danger…
RBA staff analysis conducted in November said the $200 billion in ultra-cheap loans to commercial banks, government bond buying and the 0.1 per cent interest rate would assist the recovery from the COVID-19-induced recession.
A rise in the price of houses and other assets such as shares would increase household wealth, improve household cash flow, lift consumer spending and stimulate business investment, the bank’s economists noted in an internal briefing note dated November.
The analysis noted that a permanent 1 percentage point cut in the overnight cash rate would increase real house prices 30 per cent after about three years.
“Monetary policy appears to have larger effects in local areas in which housing supply constraints are binding, mortgage debt is higher and there are more housing investors,” the RBA’s economists noted.
“Currently, much of the credit growth is coming from owner-occupiers.
“First home buyer activity has increased strongly in recent months, a positive indication of access to housing for younger households, according to loan commitments data.”
The RBA noted that they were standing by, and might intervene if they thought debt levels were starting to pose a risk to financial stability.
But whatever. That’s not happening any time soon.
Because households have been paying down debt at a furious clip since Covid landed on our shores. Look at the growth in the credit aggregates:
With credit growth stalling out, it’s very hard to make the case that debt-levels are getting out of control.
Which is why the RBA is chill.
If house prices are to boom 30%, so be it.
And who are we to argue.