RBA playing a dangerous game with housing

ANALYSIS: Australia and Hong Kong are consistently judged to have among the most open economies in the world but they have responded very differently to booming housing prices.

In the past two years Hong Kong has introduced a range of measures aimed at cooling its domestic property market, including a 15 per cent tax on property purchases made by foreigners and a doubling of stamp duty that applies to everyone except permanent residents who are first-time buyers.

It has had an impact. From January to October 2013, the total number of home sales in Hong Kong plunged 40.5 per cent compared with the same period a year earlier. Economists are forecasting residential property prices in Hong Kong will decline by about 10 per cent in 2014.

Meanwhile, over the North Pacific, Canada has just said a 28-year-old visa scheme designed to attract wealthy foreigners to the country is to be axed, amid growing fears of a housing bubble.

Back in Australia, where, for instance, the median price of an apartment in Sydney is now $530,000, our policy makers seem divided on whether we even have a problem.

The RBA recently noted that while housing prices have been rising ''quite strongly'', the gains were still well below growth rates seen in the early 2000s.

More significantly, the RBA stressed that rising housing prices are an important channel through which expansionary monetary policy supports economic activity.

Rising housing prices and turnover stimulates consumer spending by easing home owners' borrowing constraints and raising home owners' perception of wealth, the RBA said. What it didn't say was that stimulating consumer spending via the housing market is necessary because many of the past drivers of economic growth in this country are evaporating. But housing is not just another asset class. As a tool for economic policy it is deeply flawed.

As academics such as Clive Hamilton, professor of public ethics at Charles Sturt University, have noted recently, affordable property plays a crucial role in the health of any vibrant society. ''It's where people live, put down roots, raise families and join in their communities,'' Professor Hamilton wrote last month.

From a social policy perspective a disaster long ago unfolded. First home buyers as a proportion of total borrowers have fallen to a record low of 12.3 per cent nationally, from about 20 per cent at the end of 2011, according to the Bureau of Statistics.

From a systemic risk point of view the prudential regulator might be the first to act. Last October New Zealand's Reserve Bank introduced restrictions on high loan-to-value (LVR) ratio housing mortgages. From October, NZ banks are required to restrict new residential mortgage lending at LVRs of more than 80 per cent to no more than 10 per cent of the dollar value of their new housing lending flows.

The NZ regulator justified the move by suggesting it is ''concerned about the rate at which house prices are increasing and the potential risks this poses to the financial system and the broader economy''.

So far Australia's regulators have said they don't believe Australia has reached a point where such measures need to be considered.

Instead the Australian Prudential Regulation Authority has relied on cautioning banks privately - including directors directly - against lowering lending standards. It has previously written to bank management and their boards urging diligence in this area.

Meanwhile, in Germany there is little history of persistent house price inflation, most often attributed to constant growth in housing supply and a central bank willing to take action when it believes property prices are rising unsustainably. For what you might pay for a modest flat in Ballarat or Wollongong you can still get a decent-sized family home in Cologne or Hanover.

Consumer confidence is near record highs in Germany, but unlike Australia, it is built on high job security and rising incomes off the back of the export of sophisticated consumer goods. Now that's a sustainable economy.

Stewart Oldfield is a research analyst at Wilson HTM. His views should not be taken as investment advice. stewart.oldfield@wilsonhtm.com.au

SMH.COM.AU

Affordable property plays a crucial role in the health of any vibrant society. Photo: Louie Douvis

Affordable property plays a crucial role in the health of any vibrant society. Photo: Louie Douvis

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