Wednesday, March 10, 2010

Warning: RBA to crunch housing boom to save economy from overheating

Glenn Dyer writes:


We have been warned: the current housing boom risks ending in tears with the Reserve Bank forced to crunch it to save the rest of the economy from overheating. Its not a new warning from the central bank, but the time is approaching that the bank will stop being nice and bash the housing sector with a brutal rate rise (or rises) that surprises the deliberately deaf and ignorant in politics, business and the media.

It's a bit rich when the only consistent voice warning us of the dangers of rapidly rising house prices, is the Reserve Bank and its senior officials and it's really rich that these warnings have fallen on ears made deaf by conflicted self interest.

The bank's head of economics, assistant governor Phil Lowe, was the latest in a growing list of senior central bankers out this morning warning of the dramatic impact of rising house prices.

He joins governor Glenn Stevens, deputy Ric Battellino, assistant governor Guy Debelle and head of research Anthony Broadbent, who in the past nine months all pointed to the dangers of rapidly rising house prices to the economy and to the country's social fabric.

Stevens started the warnings in a speech last July:

"If all we end up with is higher prices and not many more dwellings -- then it will be very disappointing, indeed quite disturbing. Not only would it confirm that there are serious supply-side impediments to producing one of the things that previous generations of Australians have taken for granted, namely affordable shelter, it would also pose elevated risks of problems of over-leverage and asset price deflation down the track."

The evidence is, so far, that we have ignored this. It is not a case of the first home buyers stimulating prices, it is that state and local governments, existing home owners and others have restricted the supply of new land for housing on a range of grounds, from the political to environmental.

That in turn has boosted property prices, making those existing land and home owners richer and more determined to block the releases. As a result prices continue to rise, forcing the cost of all housing, new and existing higher. Rents are rising strongly again, and that will feed through into inflation. State and local governments do nothing except sit back and watch fee income and stamp duty receipts surge. Their warnings are hollow and conflicted.

Sure plenty of social policy groups issue warnings, but they lack the clout of the central bank. Their warnings are routinely picked up by the media, especially the Fairfax press and by TV news and current affairs, and then forgotten as the same media outlets breathlessly tell us of where the local and newest hot spots are, or where the bargains are to be found.

The approach of Fairfax and News Ltd is instructive: they weigh in with stories warning about the dangers of rising home prices, worsening affordability, and then publicise sales clearances, wonder houses, record prices and all the other ephemera of keeping readers in their real estate and money sections where listings of houses, apartments, loans and other deals generate millions of dollars a year in revenue.

The media in fact has an enormous conflict of interest in the real estate market: their publicity helps to power the real estate carousel, without it, the merry-go-round would slow and splutter.

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