Offer Australians cheap money and they’ll rush out to buy housing.
If any proof was needed, it’s in the July household finance numbers.
That is both the good and bad news for the Reserve Bank of Australia – the official body concerned with where the Australian economy is heading and how Australians are faring within that economy.
With weak wages growth, depressed consumption, rising unemployment and the federal government tightening fiscal policy, we needed a floor under falling housing prices in the key Sydney and Melbourne markets.
The high cost of Australian housing is not desirable, but neither would be collapsing household confidence if prices had continued to tumble in line with the more pessimistic predictions.
Expensive housing is a burden for heavily-geared individuals; losing your job and home in a recession is a financial and personal disaster.
There remains plenty of uncertainty about how far the price recovery will run.
Sales volumes remain low and there is more unit stock in the pipeline, but the speed of the turnaround over the past four months and the renewed enthusiasm of bidders is undeniable.
Roughly two-thirds of Australians either own their home outright or are in the process of paying it off.
Falling prices do nothing for their economic confidence while the “wealth effect” of firm prices helps grease the wheels of consumption.
In the longer term, however, reigniting a housing bubble would be part of a bigger asset inflation problem that ends up hurting the nation as a whole.
As RBA governor Philip Lowe told a conference of central bankers in August, low interest rates pushing up asset prices has its own set of risks.
Housing is only the most obvious of those risks for the Australian audience. It ends up extending to all asset classes, benefitting those fortunate enough to already own the assets, disadvantaging those who do not.
It means increasing wealth inequality, which eventually results in increasing income inequality and a damaged nation.
At the Australian housing level, the impact is obvious for the nearly one-third that doesn’t own a home or have a mortgage.
Getting on the property ladder is made harder for would-be, first-home buyers – more fail to make that first step with implications for their financial security later in life.
And more expensive housing means the people with the real housing crisis – those on low incomes with no prospects of ever owning – end up facing even more unaffordable rents in the absence of anything like reasonable social housing availability.
In a perfect world, housing prices would stabilise and grow slowly, but the world is not perfect and no institution is capable of managing such a market.
Right now, a floor under prices is desirable, but the prospect of further RBA interest rate cuts raising the price roof is not.
Yet that is what’s threatened by the standoff between the RBA and federal government on economic policy.
The federal government’s priority remains claiming a budget surplus. It has repeatedly ruled out any further assistance, despite no financial year since the recession having worse economic growth than 2018-19.
Politically, the Coalition has form in embracing housing bubbles over the decades. The one thing worse for the Coalition base than housing prices soaring is housing prices falling.
Meanwhile, the RBA only has its single blunt instrument of monetary policy with which to try to reduce unemployment. The money market betting – the assumptions within the RBA’s own forecasting – is that rates will indeed be cut again.
That means yet cheaper money will be thrown at Australians.
At the same time, the banking regulators have taken their foot off the real estate investor brakes and are encouraging banks not to be too cautious in their lending after their initial reaction to the banking royal commission.
The stories already rolling in of properties selling well above reserve, of fevered bidding, feed our real estate obsession.
Average Australians might not appreciate the theory of Dr Lowe’s asset inflation concerns, but they understand grabbing part of the real estate action when money is so cheap.
Make the cost of money cheap enough and not-very-good investments can look viable.
Without real take-home wage rises though, without business investment beyond asset speculation, without improving our productivity growth, without a stronger overall economy, the sugar-hit of cheap money eventually becomes unsustainable.
That’s what the RBA keeps warning us about. It’s what the Morrison/Frydenberg government keeps denying while trying to shift the blame for a soft economy onto the RBA for not providing more sugar.