The Reserve Bank of Australia must be viewing the end of the mining boom with some trepidation. Cutting interest rates to stimulate new home construction may cushion the impact, but comes at a price. Consumers may benefit from lower interest rates but that is merely a side-effect: the real objective of monetary policy is debt expansion. And Australia is already in a precarious position.
Further increases in the ratio of household debt to disposable income would expand the housing bubble — with inevitable long-term consequences.
While debt expansion is not in the country’s interests, neither is debt contraction (with growth below zero), which would risk a deflationary spiral. The RBA needs to maintain debt growth below the nominal growth rate in GDP — forecast at 4.0% for 2012-13 and 5.5% for 2013-2014 according to MYEFO — to gradually restore household debt/income ratios to respectable levels.
If the RBA’s hands are tied, similar restraint has to be applied to fiscal policy. First home buyer incentives would also re-ignite debt growth. The focus may have to shift to state and local government in order to accelerate land release and reduce other impediments — both financial and regulatory — to new home development. Lowering residential property development costs while increasing competition would encourage developers to cut prices to attract more buyers into the market. While this would still increase demand for new home finance, lower prices would cool speculative demand fueled by low interest rates.
I thought house holds were paying of debt faster than ever while taking less of the stuff and the debt housing growth cycle off a few years ago were history. On the other hand our incompetent government is on a debt fueled orgy following the lead of other governments while denning the facts that the revenue is drying up
Household debt is still expanding — just at a slower rate.
The RBA needs to secure these numbers for the future. This moment too many aspects are interfering with that, we can only hope they keep the dept growth within the 5%. This seems doable at the moment…
Looking at the above chart the spike in business debt is a real worry. Banksia Securities went belly up ($650M). NAB have set aside another $250M provision. This country keeps listening to political popularity polls. The world stock markets which have apparently eased the minds of superannuation managers and customers are topping out again. Believe me there is not a lot of cash to splash!
Obviously politics move markets.
When a country is militarily strong, its currency rises. When it is weaker, the currency falls. It has been like this for hundreds of years. Check it out
There is no way the RBA is running out of options. They haven’t done anything yet, except to lower interest rates some, and they have more to go. They haven’t done any less conventional things, not even QE1 yet. QE is the only foolproof way to get the overvalued Aussie dollar back to a more realistic level, and the money printed can be used to pay off the national debt.
Lowering interest rates will only work if debt expands — which the RBA don’t want. Printing money (QE) will introduce inflation which they don’t want either.
… there is limited growth realestate prices in the medium term as , eventually in a few years down the track (or a generation away) there will be a peroid of increasing interest rates which will cause realestate prices to plateau or in real terms fall , provided income growth is not excessive due to inflation … would a similiar scenario apply to share prices ?
Land prices are driven by demand. Lowering council fees and charges transfers to cost to ratepayers. In a user pays environment, this is a doomed strategy. Might as well subsidise interest and spread the burden to taxpayers, as ratepayers in one council area.
Chris
“Land prices are driven by demand”
Prices are determined by demand and supply. Removing impediments to land releases would increase supply.
we are on the inevitable way to perdition and when interest rates at cero there are no ways to make further easing. Markets nowadays are like drug addicts interest cutting programs are not good news anymore it,s an obligation and if not markets are going to plummet. The drug cutting interest rates are not working anymore for the markets. This system can only works with permanent debt extention, with some collateral side effects for the average citizen and this is creeping inflation. Most countries worldwilde are hopelessly indebted but in which pockets are the gains from this debt on the other side ? This is why fiat money systems approximately every 50 – 70 years have to fail statistically. After the ineviable crash whe have to think about a sustainable economic system that respects nature and environmental issues. Perpetual economic growth (a must in our worldwide system now) is not feasible in an limited space on earth.
We need a simpler, more robust system with strong regulation and less market intervention.