House prices are booming in Australia and New Zealand, but policymakers in the two countries are reacting very differently. While the mandate of New Zealand’s central bank has been changed to include house-price sustainability, Australia’s central bank is largely unconcerned. Indeed, the Australian bank sees the upswing as a driver of growth and a way to get inflation back on target.
Australian housing prices dipped in mid-2020 as COVID-19 spread but started rising in October and this year, month-on-month prices have risen at the fastest rate in the statistics’ 26-year history.
The central-bank guidance is that interest rates will remain at record lows for several years. Although Australia, like New Zealand, handled the virus better than many other countries, lockdowns have left people with more disposable income, boosted by the government’s fiscal support packages. But with savings returns so low, property looks more attractive now rents exceed borrowing costs.
Travel restrictions mean much of the AUD60 billion Australians usually spend annually going abroad is being redirected into housing. And employees working from home have sought to upgrade their housing and no longer need to live close to their workplaces.
Smaller cities, regional areas and coastal suburbs have thus led the upswing. Detached housing is in while inner-city apartments are not. As investors prefer city flats, they are not driving the demand. And, unusually, the construction upswing is being driven by houses, not apartments.
New Zealand housing prices, meanwhile, have risen 16 per cent in a year, the fastest since 2006. New government policies encourage first-home buyers and discourage investors but the central bank’s monetary-policy mandate is also new.
However, reducing house-price inflation would lower economic activity and inflation, making it harder for the bank to achieve its inflation and employment objectives. Indeed, giving the bank a ‘laundry list’ of responsibilities could take the pressure off other policymakers to make hard policy choices.
Although the New Zealand economy has bounced back from the initial pandemic shock, growth has lost momentum since late 2020 and inflation has remained below the mid-point of its 2 per cent target band for some time.
The housing boom caused the central bank to re-introduce loan-to-value ratio restrictions; debt-to-income limits and curbs on interest-only mortgages may follow. However, we expect the growth, employment and inflation issues to see the central bank maintain its cash rate of 0.25 per cent over 2021 and 2022.
By contrast, Australian officials have so far been quite supportive of their housing boom. They see few signs of loosened lending standards. Indeed, they regard the upswing as evidence that loose monetary policy is working.
At this stage, it could be the central bank’s strongest mechanism for lifting growth. In the absence of a business credit upturn, a leverage-fuelled housing upswing looks better than no upswing at all.
And after last year, the Australian economy needs to be in a strong upswing for underlying inflation to sustainably get back to the 2 per cent - 3 per cent target band. Another housing boom is the best option the central bank has to hand.
First published 8 and 9 April 2021.
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