The first lesson this week was that when offered cheap money, a significant number of Australians will rush to buy residential real estate, recession or not.
The second lesson was this is pretty much what core economic policy has been reduced to in Australia – inflating asset prices in hope that the “wealth effect” will trickle down into broader consumer spending.
The third lesson is that the Reserve Bank has reached the end of the piece of monetary string it has been pushing on with little success for 17 months now.
That’s it. There’s nothing more short of falling through the looking glass with policies already shown not to be effective elsewhere in the global economic wonderland.
Faced with the second-rate federal government policy laid out in last month’s budget, our central bank has had no choice but to go all in – turbo-charging the printing press, providing effectively free money at 0.1 per cent for governments, banks, building societies and credit unions.
In real terms, allowing for even a little inflation, the money is actually cheaper than free.
Oh, we would be in a worse position if the RBA hadn’t started cutting interest rates in June last year – six cuts, a total of 140 basis points, the majority of those points done before COVID hit.
Governor Philip Lowe spelt it out on Tuesday: “This lower structure of interest rates will work to support the economy through the normal transmission mechanisms, including lower borrowing costs, a lower exchange rate than otherwise and higher asset prices.”
Cheaper money does make it easier for people to service their mortgages – if they have jobs – but it does not of itself encourage them to spend the extra money rather than pay down their high debt loads.
Cheaper money makes it easier for businesses to service their debt and would make it easier for them to invest – if only they weren’t feeling insecure and concentrating on cutting costs.
Cheaper money does entice would-be first home buyers to take the plunge by making the mortgage interest bill cheaper than renting – and that is supporting housing prices.
Such very cheap money makes shares more attractive – dividend yields of even a couple of per cent start looking good.
All the RBA’s interest rate cutting has failed to stir broader inflation but, as the governor said, it does boost asset prices – asset price inflation that primarily benefits those who already have the wealth required to own assets.
Governor Lowe knows this is second-rate policy, but it’s the only policy open to him.
Dr Lowe’s speech in August last year when he said “monetary policy can’t drive long-term growth” and relying on it risked “further increases in asset prices in a slowing economy, which is an uncomfortable combination”.
The RBA also had cited the risk of reflating Australia’s housing bubble as a reason not to cut interest rates at past meetings. Now reflating housing prices is the aim of the game.
The RBA has had to deal with the limits of economic policy laid out in Josh Frydenberg’s budget and Scott Morrison’s stated preferences.
Tax cuts were given low priority by most economists ahead of the budget. The outright favourite stimulus suggestion was direct spending on extra social housing.
That advice was ignored. The government went big on tax cuts and gave stuff-all for extra social housing. As JobKeeper and the JobSeeker supplement are wound down, tax cuts are the government’s main contribution to economic stimulus.
Maybe it’s just a coincidence that the government’s priorities favour a particular segment of its electoral base – and many members of Parliament.
The surge in first-home buyers is reducing demand for rental properties just when the dive in foreign students and other temporary residents is also reducing demand for rental properties.
Vacancies are rising and rents are falling, with both trends having further to run.
A major investment in extra social housing would further damage rental demand.
It’s better for landlords if the government continues to subsidise private rentals for the disadvantaged rather than provide government accommodation.
Thus the government’s fiscal priorities are aligned with the RBA’s monetary policy in supporting housing prices.
Too bad about the insecurity of private rentals and the poor quality of most of the cheaper end of the private market in our cities – instead of the RBA financing social housing, it is running its printing press to finance tax cuts and inflate asset prices.