Reserve Bank’s inaction on rates is behind housing price crisis

What do the following things have in common: the Queen, Mother Teresa, the Pope, the ABC, Roger Federer and the Reserve Bank of Australia? They are all above reproach. It is simply not possible to criticise them and get away with it.

So let me have a go: the Reserve Bank has stuffed up big time by reducing the cash rate to its current level, by allowing it to stay too low for too long and by refusing to lift it much sooner.

Arguably, the Reserve Bank is the principal force responsible for our current crisis of housing affordability.

And if that’s not bad enough, it is now in a complete bind as the debt levels of the household sector have exploded, which means that even small increases in the cash rate will place large numbers of households in serious financial stress, with mortgage arrears likely to rise significantly.

In turn, this will imperil the stability of our banking system. Let’s face it, our banks are really just big credit unions that provide housing finance.

You just have to look back at the RBA’s hopelessly naive statements in relation to property prices moderating — nothing to see, all under control. It would seem that the governor — both of them — thought that saying this might make it so.

Just take a look at the alarming figures. Sydney house values have increased by 19 per cent over the past year; in Melbourne, values have risen by 16 per cent. With the exception of Perth, where the impact of the end of the mining investment boom is still being felt, house prices are galloping ahead — nearly 13 per cent on average across the country over the past 12 months.

And this is occurring at a time when real wages are flat and there is very little growth in household income.

It seems that the Reserve Bank has been only too keen to handball the problem of escalating house prices to someone else. APRA crimped the growth of investor housing loans to 10 per cent per year — was this a joke? Now APRA wants to do something about interest-only loans. ASIC also wants to get in on the act. Judging by experience, the RBA is extremely gullible if it thinks that any of these macro-prudential measures will work in the context of interest rates that are at emergency levels even though there isn’t an economic emergency and hasn’t been for some time.

To be sure, housing affordability isn’t just about interest rates being too low — and bear in mind that both private business investment and inflation have failed to respond, so why bother keeping them so low — but also includes credit availability; high population growth; tax and pension arrangements that favour housing investment; and sluggish supply.

But given that the RBA can’t influence any of these other factors, there was a very strong case for lifting the cash rate some time ago. And in the meantime, the bank needs to ignore the wacky advice from the International Monetary Fund that the cash rate should be cut even further — that agency lives in some sort of Keynesian fantasy land and is definitely not beyond reproach.