Don’t Bet The House On Higher Rates

The Reserve Bank of Australia is deeply worried about the housing market, which is showing all the classic signs of an asset price bubble. Bubbles are interesting and fun until the burst-that’s when they leave sticky gum on people’s faces. The bank hates cleaning up the mess from burst asset price buddles.

The problem for the RBA is that stopping asset price bubble is-strictly speaking-not part of its job. The bank’s job is to control inflation; that is, the prices of goods and services, not assets. But what about cleaning up the mess after the bubble finally bursts? Well, yes that is part of the bank’s job but its friends at the Australian Prudential Regulation Authority-the financial regulator-have helpfully told us that even a sudden and sharp decline in house price would not faze the banking system.

The RBA has been desperately seeking a reason to raise rates to slow the housing boom. There may be good reason to bring housing under control, but tightening monetary policy is not the way to do it. This will slow the economy unnecessarily on account of the higher dollar, push inflation below the RBA’s target range and knock the top off growth for the next year at least .The bank was given an inflation target for a reason. It should stick to its brief.

A burst housing bubble will cause pain but APRA says it’s manageable. The bank’s well-meaning efforts might end up doing more harm in the general economy-especially in sensitive export and import-competing sectors- than it is seeking to avoid in the housing market


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