From Rising Interest Rates to Macro-Economic Control

Following on from our last post US Interest Rates Key to Oversupply in Property Market it now seems prudent to look at another economic regulator, macro prudentialism! This is because, as the Financial Review reports: “the Reserve Bank of Australia ‘is’ seemingly resistant to raising interest rates to control a possible housing bubble”.

This is despite the fact that ultra low interest rates continue to inflate the property market. An outcome our economy seems to rely on, with the reverse (a falling property market) too nerve-racking to contemplate. At the same time regulators are aware that the bubble cannot expand much further and a potential burst has to be controlled somehow. Therefore they seem to rely more, with the exception of the US, on macro prudetialism then putting the handbrake on the matter using interest rates.

Tighter Lending

Macroprudential regulation means, in this case, tighter lending. More specifically, it is getting more difficult to get a loan or a mortgage, which impacts on the property market in that less buyers are there to drive competition and the property market up. It also means that the dream of buying a house remains just that, a dream, for many average households and first-time buyers. Instead, it continues to drive the market to cashed-up investors or overseas buyers.

Greater Restrictions

As a solution, regulators are proposing greater restrictions on overseas buyers to limit property exposure and curtailing continuing sharp rises in popular property markets such as Melbourne and Sydney.

Macroprudentialism vs Interest Rates

Going back to the basics. The difference, in impact on the property market, is that macroprudential interventions propose to curtail the rising market, whereas, interest rate interventions would, most likely, cause the market to fall sharply. In short, we are opting to pull the band-aid off very very slowly rather than quickly. In real terms, interest rate rises would impact on those highly exposed to the market and benefit those who want to enter the market due to lower cost, whereas, macroprodentialism protect those currently in the market and hopes that labor market growth is maintained or sped up to meet future cost of housing.

Slow Growth vs Crash

The fact of the matter is that the bubble scenario ship has sailed. We have created a bubble! It is now a matter of what will happen in the future. Will we control the bubble with rising interest rates and thus adjust the market with a crash or will we be able to curtail growth and let sustainable growth catch up, as depicted in the chart bellow.

It seems our regulators have decided to attempt the latter. It’s a nervous game they now play. If the US decides to increase interest rates, because they can afford to as they’ve already had their crash, how many other’s will follow? And how long can Australia hold on to it’s low interest rates?