Some financial sector economists were caught off-guard by the very different conclusions presented in Monday’s research paper, suggesting there were some cracks in the bank’s communications on the topic.
“It’s fair to say there have been mixed messages” around the role monetary policy has played in the housing price boom, JPMorgan economist Ben Jarman said.
“I’ve always thought Lowe has underplayed the role of interest rates in the housing cycle,” added Macquarie economist Justin Fabo.
Mr Jarman said there was “an element of politics” in the governor’s message, in as much as the RBA was keen to position the recent falls in house prices as “the inevitable consequences of migration”, rather than the result of tightening credit conditions brought about by tighter regulation.
“It’s politically safer to blame that on exogenous factors such as population growth,” Mr Jarman said.
“The general strategy is to make interest rates as small a target as possible, to say rates don’t have as much bearing on house prices so therefore shouldn’t be part of the solution, as well as trying to create a bit of separation between macro-prudential policies and credit conditions and the effect that is having on house prices.”
ANZ head of Australian economics David Plank said the RBA governor’s comments last week were more in reference to the recent falls in house prices in the two biggest cities, which “clearly hasn’t been driven by higher rates”.
(The official cash rate has remained unchanged at a historical low of 1.5 per cent since August 2016.)
Indeed, minutes from the RBA’s February monetary policy meeting noted that “members spent some time considering a paper on the implications of recent developments in housing markets for the economic outlook”. Dr Lowe’s remarks last week drew from this board paper.
Monday’s research, in contrast, focused on the longer term impact of falling rates on house prices.
“I don’t think necessarily the two are in sharp conflict,” Mr Plank said.
“We have always thought the main driver of the uplift in house prices over the past 20 to 30 years was the capitalisation of falling interest rates into prices.”
UBS economist Carlos Cacho echoed the views of his peers, saying “credit growth is key to house prices, which historically has been driven by rates”.
The timing of Dr Lowe’s comments — just before the release of findings that would claim the opposite — was “surprising” given the research paper would have been reviewed and circulated internally before publication, Mr Cacho said.
That said, the research paper was “more of an academic exercise than a policy one, and that is the lens through which you have to look at it”, he said.
On its website, the central bank notes that the views expressed in its occasional research discussion papers “are those of the authors and not necessarily those of the Reserve Bank”.
Mr Plank went further: “It’s a great thing [the RBA] have published [the latest research] – it’s great for the debate.
“We should commend them for that, regardless of whether it agrees or disagrees with their stated view.”
Next week the RBA’s Bulletin will publish research into another fraught topic: how moves in house prices have influenced household spending decisions, known as the wealth effect.
“The RBA is very much relying on income growth to pick up to support consumption, and we are not convinced that is going to happen,” Mr Cacho said.
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