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Reserve Bank acknowledges economic threat posed by landlord surge

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A bigger share of GDP needs to go to working people, Dr Philip Lowe says. Photo: The New Daily
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The Reserve Bank has given its strongest signal yet it will finally curb the property speculation boom fuelled by the banks, which many fear is squeezing out young buyers and risking another economic crash.

Australia’s central bank is “prepared” to once again “put a bit of sand in the gears” of investor lending, the Reserve Bank’s assistant governor for the financial system, Michele Bullock, told a Bloomberg event in Sydney on Tuesday.

After a few years of respite, the pace of investor loan growth has “speeded up again”, Ms Bullock admitted, and “from a financial stability perspective, certainly, we are watching it”.

In late 2014, the RBA’s twin regulator, APRA, imposed a 10 per cent per year growth limit on investor loans and scrutinised bank practices more closely, which deterred many potential landlords.

But these “macroprudential policies”, as they’re known, wore off. Investors now account for 50.2 per cent of new home loans.

Young Australians are suffering as a result, RMIT’s Professor Tony Dalton, a leading housing policy expert, told The New Daily.

“The evidence is pretty clear that investors are dominating and that people who might otherwise have become first home owners are losing out,” he said.

“You would be expecting the Reserve Bank to be ready to intervene to deal with the risks.”

Because of the property boom, Australian households are the third-worst indebted in the world, according to the Bank for International Settlements. Household debt is now 123 per cent of GDP, up from 34 per cent in 1977.

The latest CoreLogic figures for February put annual house price growth at 18.4 per cent in Sydney, 13.1 per cent in Melbourne and 10.3 per cent in Canberra.

Professor Dalton said the RBA will be forced to intervene because the federal government refuses to wind back landlord tax perks.

In the absence of fiscal intervention, the central bank is in a bind, as it juggles its dual mandates of preserving financial stability while getting inflation back on target.

RBA governor Philip Lowe acknowledged this when he told Parliament last month: “The balance that is required is to support spending in the economy today while avoiding creating fragilities in household balance sheets that could cause problems for the economy later on.”

The central bank is struggling to boost ‘core inflation’ (inflation minus temporary price shocks, such as natural disasters), which it predicts will undershoot the 2 to 3 per cent target well into 2019.

michele bullock
The RBA’s Michele Bullock says she is “continuing to monitor” investor lending. Photo: RBA

Further rate cuts are the obvious fix.

The problem is that the bank believes, as many do, that low rates stoke house prices. Governor Lowe’s predecessor and mentor, Glenn Stevens, warned in 2012 that using ultra-low rates to clean up after the global financial crisis could bring “its own toxic consequences” of booming property prices and dangerous levels of debt.

So, instead, the central bank could do the opposite and lift rates to slow the housing boom. But this would likely reduce household consumption, putting GDP growth (currently a shaky 2.4 per cent) at risk.

The safe option, and the one the RBA seems to be considering, is to leave rates where they are and rely instead on APRA to further tighten bank lending.

There are critics.

UNSW economist Dr Nigel Stapledon, a housing market expert, told The New Daily the “banks are grown-ups”, but that extra lending restrictions could deter self-regulation.

In any event, the price boom will eventually “burn out” of its own accord, Dr Stapledon said.

He said the real risk is that tax reform on the demand-side will mask the “underlying cause” of rampant price growth, which is a lack of housing supply brought about by “sclerotic” state planning controls.

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