September 6, 2014 - 12:15AM Gareth Hutchens and Clancy Yeates
One of Australia's most pre-eminent economists has warned the "whole economy" needs lower interest rates but that the Reserve Bank's concern over the housing market is preventing this happening.
Professor Ross Garnaut, author of the respected Climate Change Review, says he is concerned about house prices in Sydney and Melbourne because they are preventing the Reserve Bank from lowering interest rates to the level needed to bring down the exchange rate.
Australia's economy was facing "very difficult circumstances," he said, and a lower real exchange rate was needed to prevent the economy weakening further.
"We needed a lower real exchange rate 18 months ago," Professor Garnaut said.
"There may be excessive price inflation in housing, and if that is the case it is very important that we deal with that problem with specific measures rather than running our whole monetary policy to suit the housing sector."
His comments come as ratings agency Standard & Poor's cautioned against further stimulating Australia's mortgage market, saying it would increase the risk of a housing bust and make the country more vulnerable economically.
Similar concerns about fuelling the mortgage market have also been raised by the Reserve Bank. Governor Glenn Stevens this week warned higher house prices were beginning to crimp monetary policy.
The Australian Prudential Regulation Authority has also raised concerns about the mortgage market.
Professor Garnaut said problems in Australia's overheated housing market could be fixed by removing the "privileged position" of housing for capital adequacy purposes.
"It is ludicrous to be worried about lending risks in the housing sector on the one hand while at the same time requiring banks to put more capital aside when they are lending to BHP," he said.
"And there are several reasons to do something about negative gearing. There are budget reasons, and reasons to do with keeping within reach the old Australian dream of widespread home ownership.
Standard & Poor's has cautioned against further stimulating the mortgage market, saying this would increase the risk of a housing bust and make Australia more vulnerable in a financial shock.
The global credit ratings agency also backed the big banks' opposition to "bail-in" rules for creditors, warning the major lenders could be stripped of their AA- credit ratings if Australia went down this path.
In a submission to the financial system inquiry led by former Commonwealth Bank chief David Murray, S&P argued against several policies floated by Mr Murray to help smaller lenders compete in home lending.
Regional banks have told the inquiry they face an unfair playing field under current rules that allow the big four banks and Macquarie about half as much capital for every dollar lent out, because of the larger banks' more advanced risk systems.
But in a blow to the regional banks' push, S&P said giving the smaller lenders capital breaks would create new risks in the banking system.
It would likely mean the regional banks were holding smaller capital buffers for absorbing shocks, raising the risk of rating downgrades for these banks, S&P said. Moreover, it could funnel even more credit into the booming housing market, risking a "disorderly correction".
"Greater access to housing credit may put further strong upward pressure on house prices. This would increase the risk of a disorderly correction in property prices down the track, which may hurt economic growth and risk financial instability," it said.
"We already view the household sector as highly leveraged, driven by previous run-ups in house prices. Promoting higher household leverage could therefore raise households' financial vulnerability even further."
Garnauts position proves that property speculators are sociopaths who are are drain on our economy, and that bulls here have no clue about what is going on.
I wonder if Garnaut thinks we need to go to zirp too?
WHAT WOULD EDDIE DO? MAAAATE! Share a cot with Milton?
Wonder how many properties this psycho has hoarded, he must be looking to retire soon!
He is right though. The rba is ham strung. They need the govt to act, but the govt has vested interests. The economy is fucked unless they can work together. I think they need to resign on mass in protest.
Whenever you have an argument with someone, there comes a moment where you must ask yourself, whatever your political persuasion, 'am I the Nazi?'
If unemployment continues to rise and this months figures will be key, then the RBA may have little option then to cut a further 50 basis points of more from rates.
The property market certainly does not need lower rates, Sydney and Melbourne would just go nuts on further rate cuts. If that happened would be time to think about selling out of those markets.
The other capitals would see some further growth, but it really depends if investors and over seas buyers move to other cities once Sydney and Melbourne climb to high for even them.
If unemployment continues to rise and this months figures will be key, then the RBA may have little option then to cut a further 50 basis points of more from rates.
The property market certainly does not need lower rates, Sydney and Melbourne would just go nuts on further rate cuts. If that happened would be time to think about selling out of those markets.
The other capitals would see some further growth, but it really depends if investors and over seas buyers move to other cities once Sydney and Melbourne climb to high for even them.
Or unemployment could just go up.
Whenever you have an argument with someone, there comes a moment where you must ask yourself, whatever your political persuasion, 'am I the Nazi?'
all that interest rate settings do is influence the market for established dwellings. end of story. what is needed is more innovative thinking on what other services etc Australia can market to the world. we are a high cost economy so need to stop wasting time and money with shit like car manufacturing where will never compete and start looking into high tech manufacturing and like markets.
The property market certainly does not need lower rates, Sydney and Melbourne would just go nuts on further rate cuts. If that happened would be time to think about selling out of those markets.
Wow Mike,
Is that the beginning of your capitulation as a bull?? An acknowledgement that Melb and Sydney would be overheated if this whole thing went one step further and the need to sell because of the unacceptable risk..............
I'm sure you'll spin it by saying 'no just to get the most out if the CG' or some shit like that but it appears more like a glimpse of the stains appearing on your boxers, just enough for you to lean down and sniff the stench that is the shit you created.
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