The Reserve Bank’s nationwide interest rate cut on Tuesday was a blanket response at a time when experts believe we needed surgical precision.
The overheated property markets in Sydney and to a lesser extent Melbourne will only be worsened by slashing the official cash rate to two per cent, say economists.
RBA governor Glenn Stevens all but admitted he was sacrificing home buyers in Sydney (where prices have risen more than 30 per cent in three years) upon the altar of national interest.
“Dwelling prices continue to rise strongly in Sydney, though trends have been more varied in a number of other cities,” Mr Stevens said.
“The Bank is working with other regulators to assess and contain risks that may arise from the housing market.”
Fiddling with interest rates, one of the only weapons in the RBA’s arsenal, is widely considered a blunt instrument, more Thor’s hammer than surgeon’s knife, especially when it comes to solving the housing crisis.
“The real problem for the Reserve Bank is that it’s only got one interest rate for the whole country,” said Nine News finance editor Ross Greenwood after the announcement.
“You sort of get the sense if they had their way that they’d cut interest rates for Perth, Adelaide and Brisbane, raise interest rates in Sydney, and keep them on hold in Melbourne,” Mr Greenwood said.
Monash University economist Professor Jakob Madsen “absolutely” agreed with the need for a region-based response, describing the housing market as “really the problem”.
“That’s the serious problem we have in Australia now,” Professor Madsen said.
“There is so much going on across the states that it makes the rates difficult to target.”
Another economic expert supported the idea that national rate cuts fail to solve state-based issues.
“The blunt instrument of monetary policy will not achieve redistribution between areas which are doing better than others,” University of Tasmania Professor Mardi Dungey told The Conversation.
The surgeon’s knife
A rate hold or even rise in Sydney and a cut elsewhere would be ideal, but is practically impossible.
“If you could, definitely,” said Professor Madsen. “You can’t.”
A more practical and precise response would be for the nation to invest in new housing, public transport and satellite cities, he said.
“The investment in housing has not increased over the last 20 years despite the population increasing so much in the meantime.”
The recent rate cut will only be useful to current homeowners and investors, providing no relief to aspiring home buyers in Victoria and NSW where demand is highest, said a Grattan Institute spokesman.
The key to solving this problem, which has left many households unable to buy “at all”, is targeted new housing, Grattan Institute fellow Paul Donegan agreed.
“The most important thing governments can do to improve housing affordability in established suburbs of cities like Sydney and Melbourne is to make it much easier to build new homes – such as units, townhouses and flats in low-rise buildings – by streamlining convoluted local and state government planning controls and decision-making processes,” Mr Donegan said.
A better national response
If such regional tinkering is impossible, then a better nationwide response to the housing market would be a blanket immigration cut, not a rate cut, said Professor Madsen.
“If they don’t address [housing, infrastructure and satellite cities], then they need to cut down on the influx of immigrants because every time you get an immigrant, you congest the housing market.
“They have to, whether they like it or not.
“The housing problem is not going to go away. It’s going to get worse, much worse.”